Exit load in mutual funds

Mutual Fund exit load is a fee charged by the mutual fund houses if investors exit a scheme partially or fully within a certain period from the date of investment, as specified in the Scheme Information Document. Some schemes do not charge any exit fee. Mutual fund charges exit load to discourage investors from redeeming before a certain time period. This is done to protect the financial interest of all investors in the scheme, especially the ones who remain invested. Different mutual funds houses charge different fees for different schemes as an exit load. If you want to invest for short tenures then you should understand the exit load structure of the scheme so that you can make informed investment decisions.

How is exit load calculated?

We discussed, what is exit load in mutual funds. Let us now understand how it is calculated. Exit load structure of a scheme specifies two parameters – mutual fund fees charged as percentage of the redemption amount at applicable NAVs and the exit load period (period from the date of purchase).

Suppose a scheme charges 1% exit load for redemptions within 365 days from the date of purchase. Suppose you redeem 500 units of a scheme 4 months after your date of purchase. Let us assume that the NAV is Rs 100. The exit load will be = 1% X 500 (number of units) X 100 (NAV) = Rs 500. This amount will be deducted from the redemption proceeds which gets credited to your bank account. So for this, the redemption amount received in your bank account will be Rs 49,500 (Units 500 X NAV Rs 100 – Rs 500 exit load = Rs 49,500.

Exit load calculation for SIP is slightly more complex because you purchase units at different price points. Suppose you start Rs 10,000 monthly SIP in a scheme on 1st July 2020. Let us assume that the scheme charges 1% exit load for redemptions within 365 days from the date of purchase. The units purchased in July will attract an exit load if redeemed before July 2021. The units purchased next month i.e. August will attract an exit load if redeemed before August 2021, so on so forth. The table below shows the number of units every month (NAVs are purely illustrative).

Suppose you want to redeem 1,000 units on 1st September 2021. The number of units which have completed 365 days or more is 293. No exit load will be charged on these units. The balance 707 units will attract an exit load of 1%. The exit load will be = 707 units X NAV Rs 105 X 1% = Rs 742. This will be deducted from your redemption proceeds = NAV Rs 105 X 1,000 (units redeemed) – Rs 742 (exit load) = Rs 105,258.

Exit loads on different types of mutual funds

Mutual fund charges exit load on various equity, hybrid and debt funds. However, certain types of debt funds, like overnight fund and most ultra-short duration funds do not charge mutual fund exit load. Among debt funds, apart from overnight and ultra-short duration funds, many schemes in certain types of debt funds like Banking and PSU funds, Gilt funds etc. do not charge any exit load. Debt funds which follow an accrual based investment strategy usually charge higher exit loads because they want investors to remain invested till the securities mature to reduce interest rate risk.

Mutual fund charges usually higher exit loads in equity funds than in debt funds because equity funds are meant for long term investment tenures. Mostly actively managed equity funds charge exit loads. However, many index funds do not charge any exit loads. If you want to invest in equity funds and avoid exit loads, then you can also invest in Exchange Traded Funds (ETFs) which do not charge any exit load. Whether you want to invest in a zero exit load fund or not, you should always remember that equity funds are meant for long term investment tenures and invest accordingly.

Hybrid funds, including arbitrage funds charge exit loads for early redemptions. Many investors have the misconception that arbitrage funds are meant for very short durations like overnight funds and that, there is no exit load. The reality is that most arbitrage funds charge exit loads for redemptions within 15 – 30 days. Therefore, you should have one month or longer investment tenures for arbitrage funds.

Conclusion

In this article we discussed what is exit load in mutual funds? Mutual fund exit load, where applicable, are meant to discourage early redemptions to protect the interest of investors in the scheme. You should always know the mutual fund exit load or mutual fund fees of a scheme before investing. It is not correct to assume that the exit load period is always 1 year. You should read the scheme information documents to know about the exit load which will always help make informed decisions.

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