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.
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.
|Invested amount (A)||₹ 50,000|
|NAV at the time of Investment (B)||₹ 100|
|Units bought (C=A/B)||₹ 500|
|NAV at the time of redemption (D)||₹ 80|
|Exit Load [E=1% of (C*D)]||₹ 400|
|Final Redemption amount||₹ 40,000 – ₹ 400 = ₹ 39,600|
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.
|Investment in January 2019||INR 50,000|
|NAV in January 2019||INR 100|
|Units allotted in January 2019||500 (50,000/100)|
|Investment in March 2019||INR 30,000|
|NAV in March 2019||INR 85|
|Units allotted in March 2019||353 (30,000/85)|
|Redemption amount in December 2019||INR 40,000|
|NAV at the time of redemption||115|
|Units at the time of redemption||347.82 (40,000/115)|
|Exit load||1% of (347.82*115) = 400|
|Final Redemption amount||INR 39,600 (40,000-400)|
Frequently Asked Questions on Exit Load?
Mutual funds companies collect a certain fee from investors for entering the fund, managing it, and exiting it. The entry load is the fee collected while entering the fund. Exit load is the fee charged while the investor is exiting or redeeming the investment. While entry load is charged from all the investors joining the scheme, exit load is only charged from investors redeeming the investment in the lock in period. However, in 2009, SEBI did away with the practice of charging an entry load for mutual funds.
The aim behind charging an exit load from investors is to discourage the investors from redeeming the investment too early. Exit load is charged on the NAV of the fund at the time of redemption. The exit load is different for different funds and is decided by the fund manager.
The exit load on mutual funds is usually mentioned in the fund presentation, fund factsheet, and scheme information document. All these documents are available online on the fund houses’ website or can be manually collected from the fund house office.