Considered to be one of the best modes of investment, Mutual Funds are a pool of investments drawn from various individuals and institutions with the same investment objectives. However, it is not possible for individuals alone to manage these funds; hence, there are Asset Management Companies (AMCs) who manage the funds and take the investments towards growth.
These AMCs charge a small amount of fees for exiting or redeeming the units of a fund. This fee is referred to as the Exit Load. In cases such as where the investor exits the fund even before the lock-in period is over, then exit Load also applies to the commission paid to the fund house, which is also known as the pre-exit penalty.
However, there are numerous Mutual Funds without any Exit Load.. Expense Ratio is another charge that you might have to pay. It is, therefore, an important factor to be considered while investing in a fund. Note that Exit Fee is not a part of the Expense Ratio.
Why Exit Load?
The main idea behind levying Exit Load on the exiting or redeeming your units from the fund is discouraging investors from pulling out their investments before their maturity. Imposing such charges over premature redemption of the fund would push the investors to give a thought before making such decisions; as a result, reducing the number of withdrawals from the fund.
How is Exit Load Calculated?
Exit Load or Exit Fee is a percentage of the Net Asset Value (NAV) of the mutual fund. The amount that is left after deducting the Exit Load from the Net Asset Value of the units redeemed is credited to the investor’s account.
Let’s take an example to understand the calculation of Exit Load-
Suppose an investor invested Rs. 20,000 in a mutual fund scheme in January 2018. The scheme charges an exit load of 1% if redeemed before 1 year. The NAV is Rs.100; which implies that the investor has 200 units.
Now, the investor wishes to redeem the units in a time period of 4 months i.e. in May 2018. In such a case, the investor will have to pay an exit load as follows-
|Invested amount in January 2018||20,000|
|NAV at the time of Investment||100|
|Units bought||20,000/100= 200|
|NAV at the time of redemption in May 2018||90|
|Exit Load||1% of (90*200)= 180|
|Final Redemption amount||18000-180= 17,820|
Exit Load on Types of Mutual Funds
Different types of mutual funds charge different rates of Exit Load. Moreover, not all mutual funds have exit load. Hence, it is suggested that you carefully check the exit load of the mutual fund schemes that you are choosing to invest in.
Given below are the rates on types of Mutual Funds-
- There is no entry of exit load on liquid funds. This implies that the investors can redeem their investments and the money will be credited to their bank account the next working day.
- Some Debt Funds have exit loads. However, the expense can be ignored by aligning their investment tenure with the period for which the fund levies an exit load.
- Exit load on SIP is same as all the other mutual funds. Each SIP installment must complete a period of 12 months in order to escape the exit load for that particular . For instance, if you have done a SIP for 3 years, you will have to wait for 1 more year if you do not plan to pay the exit load.