Exit Load in Mutual Funds
by Rajeev Pathak
What's an Exit Load?
An exit load represents a fee imposed by a mutual fund company when investors redeem or sell their units before a predetermined period. This fee serves the dual purpose of discouraging short-term trading and compensating the fund for potential costs associated with early redemptions.
Why Exit Load is charged?
By implementing an exit load, mutual funds aim to safeguard the interests of long-term investors from potential negative impacts caused by short-term trading activities.
How Exit Load is calculated?
The exit load is calculated as a percentage of the redeemed units' value and is subtracted from the redemption proceeds. For instance, if a 1% exit load applies and an investor redeems Rs 10,000 worth of units, the fund deducts Rs 100 as the exit load, resulting in the investor receiving Rs 9,900 as the redemption proceeds.
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It's important to note that not all mutual funds impose exit loads, and the specific exit load structure can vary across funds. You can find detailed information about any applicable exit load, including its duration, in the mutual fund's offer document or scheme information document (SID).
Calculating exit load in mutual funds involves knowing the exit load percentage charged by the specific mutual fund scheme. This information is typically available in the offer document or SID. Exit loads are commonly applied if an investor exits the fund within one year. For example, if a scheme has a 1% exit load for redemptions within 365 days, the exit load is calculated by multiplying the percentage by the number of units and the Net Asset Value (NAV).
In the case of Systematic Investment Plans (SIPs), each instalment is considered separately for exit load calculations. It's crucial to be aware that exit load criteria may differ among various mutual funds and schemes.
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Exit load criteria also vary based on the type of mutual fund. Debt funds, which invest in fixed-income securities, often have lower exit loads compared to equity funds. For instance, a debt fund may charge a 0.5% exit load if redeemed within 90 days. Equity funds, with a higher risk-reward profile and longer investment horizons, may impose a higher short-term exit load to discourage early exits, although many equity funds do not charge any exit load.
Hybrid funds, including arbitrage funds, may impose an exit load if an investment is redeemed early. Despite common misconceptions about arbitrage funds being suitable for very short periods, they often charge an exit load if redeemed within 15 to 30 days. Therefore, it is advisable to maintain an investment tenure of one month or longer for arbitrage funds.
Conclusion:
In conclusion, understanding exit loads is crucial for investors to grasp the actual profits after factoring in all costs. The specific exit load structure varies among mutual fund schemes, and details are typically outlined in the offer document or SID. Prospective investors are advised to thoroughly review these documents and comprehend the applicable exit load fees before making any mutual fund investments.
Frequently Asked Questions (FAQs)
1. What is exit load in mutual funds?
Exit load
is a fee charged when you redeem mutual fund units before a specified holding
period.
2. How can I avoid exit load?
By
staying invested for the minimum required duration mentioned in the scheme.
3. Is an exit load applicable on an SIP?
Yes, each
SIP instalment is treated separately for exit load calculation.
4. Do all mutual funds charge exit load?
It
depends on a particular scheme. The exit load rate differs from scheme to scheme and is not charged at all in a few schemes.
5. What is the typical exit load in equity funds?
Usually
around 1% if redeemed within 1 year.
6. Is exit load deducted separately?
No, it is
deducted from your redemption amount.
About the Author:
Rajeev Pathak is an ex-banker, financial author & advisor. He possesses more than 4 decades of experience at a senior level in the BFSI sector. Currently, he resides at Gandhinagar, Gujarat.
He writes on banking, credit, investment & personal/MSME finance.
He is also an AMFI Registered Mutual Fund Distributor (ARN-116642), empanelled with almost all major AMCs in India. He serves mutual fund investors across the country and abroad.
For any queries/assistance, he may be reached by email to boirajeev@gmail.com
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Disclaimer:
Mutual fund investments are subject to market risks. Investors should read all scheme-related documents carefully before investing.
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