Exit load is a fee that a mutual fund house charges the investor when they exit the scheme or redeem their units. The main motive behind charging a fee is to discourage investors from exiting the scheme early. Mostly, funds charge an exit load when an investor exits the scheme before one year. The exit load varies between 1% to 5% of the investment, depending on the mutual fund house.
When an investor redeems units, the fund house charges an exit load, which is a percentage of the Net Asset Value (NAV) at the time of sale. For example, you decide to sell 1,000 units of a mutual fund scheme that you purchased 5 months earlier. You will be charged a 1% exit load for selling the units before completing 1 year. Let’s assume the NAV is INR 200. You will receive INR 198 per unit (200 – 2). As a result, the total amount you will receive is INR 1,98,000 (1,000 * 198).
It means you paid INR 2,000 as exit load (INR 2 per unit). Had there been no exit load, the total amount you would receive would be INR 2,00,000 (1,000 units * INR 200).
Furthermore, the concept of exit load is also relevant to Systematic Investment Plans (SIPs).
Different types of funds have different exit loads. Equity, hybrid, and certain debt funds charge exit load on early redemptions. Overnight or ultra-short term debt funds do not have any exit load. However, other types of debt funds have exit loads.
Furthermore, equity funds charge a higher exit load than debt funds. Equity investments are meant to be for a long duration. Thus, they charge exit load on early redemptions. Furthermore, actively managed funds charge exit load and passively managed funds don’t.
Is Exit Load Good or Bad?
The main aim of exit load is to ensure that investors have a long-term perspective on their investments. Without any exit load, fund managers may face large redemptions. High redemptions will have an impact on the fund’s performance. This is because the fund has to sell its holding to meet the redemption requirements.
Often fund managers curate portfolios with a long-term perspective as well. Thus, short term redemptions will have a significant impact. Therefore, having an exit load will help align the fund’s goal and the investor’s horizon.
Furthermore, early exits by an investor will have an impact on the returns of existing investors. As a result, having an exit load can help avoid this scenario or reinvest the amount to benefit investors who still hold the assets.
Only invest in an equity mutual fund if you have a longer time horizon (more than five years). You need not worry about exit load if you plan your investments well. Debt funds can be utilised to meet short-term demands. There are no exit loads in specific debt fund categories in most cases.
Most actively managed funds do not charge any exit load for redeeming 10% of the units before one year. However, redemptions of more than 10% of the units attract a 1% exit load.
Which one You Prefer?
Lastly, when you are investing towards a goal, it is advisable to stay invested until you reach your goal. Furthermore, you need not worry about exit load if you have a well-planned long-term investment strategy. Thus, when you have a long-term investment perspective, a high or low exit load should not impact your fund selection to a great extent. Rather focus on aligning your investment goal with the fund’s objective.