When investing in mutual funds, it’s important to understand the concept of exit load. This is a fee that some mutual fund companies charge investors when they redeem or sell their units within a certain period of time after the initial investment. The purpose of this fee is to discourage short-term or speculative investments and ensure that investors are committed to holding their units for a longer period of time.
Application of Exit Load
Exit loads are typically applied during the first few years of an investment and the fee percentage decreases as the holding period increases. For example, a mutual fund may charge a 2% exit load if units are redeemed within the first year, 1% if redeemed within the second year, and no fee if redeemed after the third year.
To calculate the exit load, let’s take an example of an investor who invested ₹5,00,000 in a lump sum on July 2022, and the fund house’s exit load was one percent for the next one year. The net asset value (NAV) of the fund at the time of purchase was ₹20, meaning the investor was allotted 25,000 units. (No. of Units = Lumpsum value/NAV which here translates to 5,00,000/20 = 25,000)
If the investor decides to redeem half of the units before one year, in this case on May 2023, and the NAV is valued at ₹25 at the time of redemption, they would be entitled to receive ₹12,500 X 25 = ₹3,12,500. However, since the investor is selling their units before the one-year period has expired, the transaction will attract an exit load at the rate of 1%.
Therefore, the exit load will be 1 percent of 12,500 X 25 = ₹31,250. The amount the investor will receive after redemption will be ₹3,12,500 – 31,250 = ₹2,81,250.
The exit load charged by various mutual funds varies. However, not all mutual funds charge investors an exit load. It is wise to research the exit loads of the mutual fund schemes you are considering investing in.
It’s important to note these few pointers:
- The exit load fee is applied to the redemption value of the units, not the original investment amount.
- Also, some mutual funds may have different exit load structures for different classes of units, such as different plans or options.
- Liquid funds do not carry an Exit Load clause.
- When investing through SIP, it’s important to note that every investment is treated as a fresh purchase so exit load may be charged accordingly depending on the SIP instalment amount and the exit load applicable at the time of each instalment.
- It is important to note that the time period for the exit load is calculated from the date of investment, hether it be a lump sum or a systematic investment plan (SIP).
- The exit load that is applicable at the time of investment is the onwe that will be levied.
Investors must always be aware of the exit load structure of a mutual fund before making an investment, as it can have a significant impact on the net returns. Also, it’s important to consider the lock-in period of the mutual fund scheme before investing as some schemes have a lock-in period which prohibits the investor from selling the units before the lock-in period is over, even if the exit load period is over.
In summary, exit load is a fee that some mutual fund companies charge investors when they redeem or sell their units within a certain period of time after the initial investment. It’s important for investors to be aware of the exit load structure of a mutual fund before making an investment, as it can have a significant impact on the net returns. Some mutual funds do not have an exit load, these are known as “no load” funds. Therefore, investors should carefully read the fund’s offer document before investing to understand the exit load and other charges that may apply.