While investing in mutual funds, you may have come across the term ‘exit load’. You may have been advised to check it before you redeem a fund soon after investing in it. What is this exit load and why does it matter? Let’s understand.
What Is an Exit Load?
The exit load is a fee charged by a mutual fund company when investors redeem or sell their units before a specified period. The purpose of exit load is to discourage short-term trading and to compensate the fund for potential costs associated with the early redemption of units. By imposing a fee on early redemptions, mutual funds aim to protect long-term investors from the potential adverse effects of short-term trading activities.
Exit load is calculated as a percentage of the value of the units being redeemed and is deducted from the redemption proceeds. For example, if an exit load of 1% applies and an investor redeems Rs 10,000 worth of units, the fund will deduct Rs 100 as the exit load, and the investor will receive Rs 9,900 as the redemption proceeds.
It’s important to note that not all mutual funds charge exit loads, and the specific exit load structure can vary from fund to fund. The details of any applicable exit load, including the duration for which it is charged, are provided in the mutual fund’s offer document or scheme information document (SID).
How to Calculate Exit Load in Mutual Funds
To calculate the exit load in mutual funds, you need to first know the exit load percentage charged by the mutual fund scheme you are invested in. This information can be found in the mutual fund’s offer document or scheme information document (SID). Usually, exit loads are charged by mutual fund schemes if an investor exits the fund within one year. Let’s look at an example.
For example, you invest in a scheme that charges a 1% exit load for redemptions within 365 days from the date of purchase. You redeem 1,000 units of a scheme six months after your date of purchase. If the NAV is Rs 100, the exit load will be the percentage charged multiplied by the number of units multiplied by the NAV.
Exit load = 1% ✕ 1000 (number of units) ✕ 100 (NAV) = Rs 1000
This amount will be deducted from the redemption proceeds which get credited to your bank account.
1000 (units) ✕ 100 (NAV) – Rs 1000 (exit load) = Rs 99,000.
For this example, the redemption amount you will receive is Rs 99,000.
In the case of SIPs, each SIP installment is considered separately for exit load calculation.
Keep in mind that the exit load criteria may vary for different mutual funds and schemes.
Exit Loads on Different Types of Mutual Funds
Exit load criteria can vary depending on the type of mutual fund. Here’s a general overview of exit loads for different types of mutual funds.
Debt funds invest in fixed-income securities like bonds and government securities. Generally, debt funds have lower exit loads as compared to equity funds. For example, a debt fund may have an exit load of 0.5% if redeemed within 90 days.
Equity funds typically have a higher risk-reward profile and longer investment horizons. Thus, they usually have a higher short-term exit load to discourage early exits. Having said that, many equity funds do not charge any exit load, allowing investors to redeem their units without any fee.
Hybrid funds, including arbitrage funds, impose an exit load if you redeem your investment early. Some investors mistakenly believe that arbitrage funds are meant for very short periods, like overnight funds, and that there is no exit load when you exit. However, the truth is that most arbitrage funds do charge an exit load if you redeem within 15 to 30 days. Therefore, it’s advisable to have an investment tenure of one month or longer for arbitrage funds.
Conclusion
Knowing about exit fees is crucial for investors. It will help you to understand the profits you’ll make after paying all costs. Note that the specific exit load structure can vary from one mutual fund scheme to another. The details of exit loads, including the duration and percentage, are typically mentioned in the mutual fund’s offer document or scheme information document.
Thus, carefully review these documents and understand the applicable exit load fees before investing in any mutual fund.
