Mutual fund exit load is the fee charged by a mutual fund house if you exit a scheme fully or partially within a specified time frame from the investment date. All MF schemes do not levy this charge; fund houses charge a different fee for different funds.
Why is the exit load charged?
The purpose of exit load MF is to discourage you as an investor from exiting the scheme. This exit load acts as a deterrent for many investors who want to redeem their units during the lock-in period. The exit load aims to protect the financial interest of all the investors, particularly those who remain invested.
Exit load for different types of mutual funds
Liquid funds do not have any type of exit load or an entry load. You can buy or redeem your investment whenever you want without bothering about paying any charge. However, if you exit from the scheme within seven days of allotment, a negligible exit load is levied.
Debt funds may or may not have an exit load. Gilt funds and banking and PSU debt funds do not charge any exit load. Funds that have an accrual-based strategy charge higher exit loads, as they want you to remain invested till the securities mature to minimise interest rate risk. You can stay invested for the stipulated time if you want to avoid paying an exit load.
Equity funds charge higher exit loads than debt funds, as equity funds are meant for long-term tenures. Index funds do not levy any exit loads, while actively managed funds charge an exit load.
Systematic Investment Plan (SIP)
How to calculate exit load on an SIP often confuses most investors. You may assume that if you exit the SIP you started 12 months ago, after paying the 12th instalment, you will not have to pay the exit load. However, this is not the case. Depending on the fund house policy, you will have to complete 12 months (or six months as the case may be) for each instalment to escape the exit load.
For an SIP of one year, you will have to remain invested for 12 months from the last instalment date if you want to avoid any exit load. Your overall investment duration is two years from when the SIP starts. The table, below, summarises when exit load is charged for an SIP if the lock-in period is 12 months.
|First Instalment Date
|Last Instalment Date
|Exit Load MF
How to calculate exit load
Mutual fund exit load depends on the mutual fund type and also the fund house policy. Below, we use an illustration to understand how to calculate exit load.
Akash invests Rs. 50,000 in a fund on 1st January 2020. The exit load is 1% if he redeems it before a year.
|NAV on 1/1/2020
|No. of Units Allotted
|NAV on 1/10/2020 (redemption date)
|1% of (110*500) = Rs. 550
|Final Redemption Amount
|(110*500)-550 = Rs. 54,450
Mutual fund exit load is charged by fund houses to motivate you to remain invested in schemes for the long term, especially those funds that generate good returns over a stipulated time. Before you choose a fund to invest in, find out about the exit load. Being aware of the exit load will help you time your investment duration, and you will not have to bear any charges for early redemption.