Exit Load in Mutual Funds : Definition, Types, Formula

What is an Exit Load?

Mutual fund schemes are investment options that pool investments from various individuals and institutional investors with the same investment objective. Managing a mutual fund is not a one man job. The fund manager and his team of financial experts constantly monitor and manage the fund to generate high returns. This service comes with a fee. Investors are charged exit fees on exiting or redeeming the units of a fund before the lock in period.

Exit Load also refers to an exit penalty or commission to the fund-house if an investor exits the fund during the lock-in period. The expense ratio and exit load are different. Therefore, before investing in a mutual fund scheme, consider the exit load too.

Open-ended schemes give the investor the luxury to exit or redeem the units when they want. At times when investors fail to stay invested for the duration agreed upon, exit load discourages premature withdrawals. This exit fee also reduced the number of withdrawals from the mutual fund schemes.

What is Exit Load in a Mutual Fund?

Exit load is charged as a percentage of Net Asset Value (NAV) of the mutual fund units held by investors. When an investor is exiting or redeeming the units from a mutual fund scheme, the AMC deducts the exit load from the NAV and credits the remaining amount to the investor’s account. Exit load discourages investors from withdrawing their investments frequently.

For example, Rs 50,000 is invested in a mutual fund scheme with a 1% exit load for redeeming before one year. The NAV at the time of investment is INR 100. The investor redeems the units within six month when the NAV of the fund is INR 80.

How to Calculate Exit Load on Mutual Funds?

The exit load is calculated on the NAV of the fund. The rate of the exit load is decided by the fund manager. Different funds charge different exit loads. Let’s take an example to understand how exit loads are calculated.

Suppose an investor invests INR 50,000 in a mutual fund in January 2019 at a NAV of INR 100. The number of units allotted is 500 units. He further invested INR 30,000 in March 2019 at a NAV of INR 85. The number of units allotted is 353 units. In December 2019, the investor wanted to redeem a portion of his investment (INR 40,000) at the current NAV of INR 115. The fund has an exit load of 1% if redeemed within one year of investment.

As per the fund‘s rule, the exit load will be charged on the redeemed units. The exit load will be charged on 347.82 units (40,000/115). An exit load of 400 will be charged, and the final redemption amount is INR 39,600.

Any investment withdrawn after March 2020 will be completely free of any exit load as the investor will have completed one year of investment until then.

Frequently Asked Questions on Exit Load?