What is an Exit Load?

The Exit Load constitutes a fee assessed by a mutual fund entity when investors decide to redeem or divest their units before the predetermined maturity period. The fundamental rationale behind the imposition of an exit load is twofold: firstly, to dissuade the practice of short-term trading, and secondly, to reimburse the fund for potential expenses incurred due to the premature redemption of units.

The idea behind imposing an exit load on early redemptions is to protect long-term investors from the shortcomings of short-term trading activities. 

It is also essential to understand that not all mutual funds charge an exit load fee, and specific exit load structures may vary from fund to fund. All information pertaining to the applicable exit load amount and the duration for which it is charged is mentioned in the mutual fund's offer document or the SID (scheme information document)

What Does the Term "Exit Load" Mean in the Context of Mutual Funds? Why is it imposed?

AMC’s (asset management company) charges a one-time fee known as an exit load upon the unit's recovery or withdrawal by a client. The exit load seeks to deter investors from pulling out their investments during the lock-in period.

The other reason for the decline in withdrawals from the mutual fund schemes is the exit load fee. Nevertheless, not all fund providers require investors to pay an exit charge. Therefore, the ‘exit load aspect’ should be considered when selecting an investment plan.

The exit load in mutual funds refers to a percentage of the Net Asset Value (NAV) of the mutual fund being held by an investor. The Net Asset value is the value of an entity after deduction of the entity’s liabilities.

Typically, the AMCs deduct the exit fee from the overall NAV and the rest is transferred to the investor’s account.

Let's understand with an example.

For example, if the exit load levied on a one-year scheme is two per cent and redeems in 4 months, that would be before the agreed period for investment.

This leads us to bring out a factor known as an exit load. Suppose that at redemption time, NAV is Rs.40. So, the exit fee would be 2% of Rs. 0.8 or exactly 40. Subtracting this figure from NAV of Rs. 39. The investor, therefore, gets 20 in credit.

Additionally, if the investor fulfils the contracted timespan of the funds, there will be no exit load during the withdrawal process.

How to Determine the Exit Load in Mutual Funds?

The exit load rates vary depending on the type of mutual funds, with different funds charging different exit loads.

For example, an applicant invests Rs. 30,000 in a mutual fund scheme in January 2022, with an exit load of 1% if redeemed before one year. The Net Asset Value (NAV) is Rs. 100, which means the investor holds 300 units.

Now, if the investor decides to redeem the units after four months, specifically in May 2022, they will be required to pay an exit load. The calculation for the exit load will be as follows:

Amount invested in January 2022

30,000

Net Asset value at the time of investment

100

Units Bought

30000/100=300

NAV at the time of redemption

90

Exit Load

1% of (90*300)= 270

Final Redemption Amount

27000-270=26730

Exit Loads for Various Types of Mutual Funds

Different mutual funds have varying rates of exit load. However, not all mutual funds impose an exit load on investors. It is recommended to check the exit load of the mutual fund schemes. It is advised to read the offer document or scheme information document (SID) carefully before investing.

Let's examine the exit load rates of some mutual funds.

  • Typically, there is no entry or exit load on liquid funds. This implies that investors can redeem their investments anytime, which will then be credited to their linked account the subsequent day.
  • Debt funds may or may not have an exit load. However, investors can disregard this expense by adjusting the investment tenure to align with the period for which the fund imposes an exit load.
  • The same applies to equity funds. The exit load rate varies, but it is usually around 1% if redeemed within the first 12 months. However, this rate may differ depending on the asset management company (AMC).

Exit Load for Systematic Investment Plans (SIP)

Many investors often need help understanding the concept of 'Exit Load' when investing through SIP.

The exit load on SIP may be slightly different. Each investment in SIP is considered a new purchase so the exit load may be charged based on your SIP instalment amount and redemption amount.

Being aware of the exit fee is crucial for investors. It is important to carefully consider a Mutual Fund scheme as it helps you estimate the returns after all other expenses are considered.

No investor wants to unknowingly incur a fine in the form of an exit load. Exit load can harm your planned investments, but it can be avoided if you carefully plan the sale of your units.

 

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