Mutual Fund is a pool of investments for different investors with similar investment objectives.
And Managing these funds alone is quite difficult for investors;
That’s why there are Asset Management Companies (AMCs) to handle them.
These AMCs manage the fund by the investors and ensure that the investment grows.
Mutual Fund AMCs require a team of financial experts to generate returns and manage the fund.
For this reason, these AMCs charge a small amount whenever an investor exits or redeems a fund. And this fee is called exit load.
What is Exit Load?
Exit load is the fee charged by AMCs (Asset Management Companies) to the investor at the time of exit from the units/units of the fund.
The primary reason for levying exit load is to discourage investors from closing or exiting their investments before the end of the lock-in period.
It is also a fact that many people do not unnecessarily withdraw money from mutual fund schemes because of the exit load.
So we can say that the exit load charges reduce the number of withdrawals from mutual fund schemes.
However, not all funds levy exit charges on investors.
So, whatever scheme you are opting for while investing, you need to keep in mind the ‘exit load aspect’ of that fund.
If an investor exits the fund during the lock-in period, the same is charged by the fund house as exit penalty and commission.
Therefore, while choosing a scheme, consider its expense ratio as well as the exit load.
You have to note that the exit load is not a part of the expense ratio.
What is Exit Load in Mutual Fund?
The exit load in mutual funds is generally the percentage of Net Asset Value (NAV) of the mutual fund that an investor has.
Net asset value is the net value of a unit and is calculated as the unit’s assets minus the value of the liabilities.
Usually, AMCs deduct the exit load from the total NAV and credit the balance to the investor’s account.
For example, if the exit load levied on a one-year plan is 2% and is redeemed within 5 months which will be much before the investment agreement period.
So, the mutual fund scheme will attract an exit load.
If the fund’s NAV at the time of redemption is Rs 50, the exit fee will be 2% of Rs 50. After deducting this amount from NAV which is Rs. 49.
Also, if the investor meets the agreement period of the fund, he/she will not have to pay the exit load at the time of redemption.
How to Calculate Exit Load in Mutual Fund?
The exit load rates also depend on the type of mutual fund;
Different mutual funds charge different exit loads.
Suppose an investor invested Rs 50,000 in a mutual fund scheme in January 2020.
If the fund is redeemed by the investor before 1 year, then the scheme will attract an exit load of 1% according to the terms and conditions.
NAV Rs. 50 which means the investor has 1000 units.
Now, if the investor wants to redeem the units after 6 months i.e. in July 2020.
In this case, the investor will have to pay the exit load as per the calculation:-
Value invested in January 2020 = 50,000
Value of NAV at the time of investment = 50
Number of units purchased = 50000/50=1000
Value of NAV at the time of redemption= 55
Exit Load = ============1% of (55*1000)= 550
Final Redemption Price = 55000–550=54,450
Exit Load on Different Types of Mutual Funds
Different mutual funds charge different rates of exit load.
However, not all mutual funds impose an exit load on investors.
It is advised to check the exit load of the mutual fund scheme you wish to invest in.
Let’s examine some of the rates on mutual funds.
- There is no entry or exit load on Liquid Funds. This means that investors can redeem the investment whenever they want and the money will be credited to their bank accounts the very next day.
2. Debt funds may or may not have an exit load. However, one can avoid the expense of this exit load by adjusting the investment tenure with the time period for which the fund charges an exit load.
Exit Load on SIP
While investing through SIP/SIP, most of the investors usually make a mistake in understanding the ‘exit load’.
A common belief of investors is that if they have started a SIP a year back, then no exit load will be charged from them if they sell the investment within a certain period of time.
But the truth is that most investors are getting it wrong.
Actually, the exit load on SIP is calculated like all other mutual funds.
If exit load is valid for 1 year in that plan then each SIP installment is required to complete the time period of 12 months to avoid exit load.
For example, if you have invested in SIP for 2 years, then you have to wait for 1 year from the last installment to avoid the exit load on every SIP installment, which means you will get 1 more after 2 years.
You have to wait a total of 3 years to get rid of the exit load.
