What is Exit Load in Mutual Funds? Calculation & Impact Explained
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Exit load, also known as redemption fee or back-end load, is a type of charge imposed by mutual fund houses when an investor withdraws their funds before a certain period.

In this guide, we will explore what is exit load in mutual funds, its purpose, and how it is calculated.

What is the Exit Load in Mutual Funds?

Exit load in mutual funds refers to a fee charged by the fund house when an investor decides to redeem or withdraw their investment before a specified period. It is a penalty for early withdrawal and serves as a deterrent to prevent frequent buying and selling of mutual fund units. The purpose of exit load in mutual funds is twofold.

Firstly, it helps fund managers manage their portfolios efficiently by reducing the impact of frequent investor movements. Secondly, it ensures that long-term investors are rewarded by discouraging short-term speculation and promoting a disciplined investment approach.

The calculation of exit load varies across mutual fund schemes and is usually expressed as a percentage of the redemption value or the applicable Net Asset Value (NAV) at the time of withdrawal.

How Do You Calculate Exit Load in Mutual Funds?

Exit load is a fee mutual funds charge when investors redeem (or exit) their investment within a specific period from the investment date. This fee is a percentage of the NAV (Net Asset Value) at the time of redemption and is designed to discourage short-term withdrawals. Understanding how to calculate this fee and what factors influence its calculation can help investors make more informed decisions.

Calculation Methodology for Exit Load

The formula for calculating exit load is 1%*(number of units)*(NAV).

Factors Influencing the Calculation

  1. Investment Amount: The total amount invested in the mutual fund.
  2. NAV (Net Asset Value): The per-unit price of the fund on the day of redemption.
  3. Exit Load Percentage: Varies from one mutual fund to another, typically mentioned in the scheme information document.
  4. Holding Period: The duration for which the investment is held. Exit loads usually apply if the investment is redeemed before a certain period, which varies across different schemes.

Example to Illustrate the Calculation Process

Let's illustrate the calculation of exit load through examples, considering different scenarios from an Indian perspective:

Example

Investment Amount (INR)

NAV at Redemption (INR)

Exit Load Percentage

Holding Period

Exit Load Amount (INR)

1

1,00,000

50

1%

6 months

1,000

2

2,00,000

100

0.5%

3 months

1,000

3

50,000

20

2%

1 month

1,000

Exit Loads on Various Types of Mutual Funds

Exit loads can differ across various types of mutual funds in India, depending on factors such as fund category, investment duration, and fund objectives.

Equity funds, which primarily invest in stocks, generally have higher exit loads than debt funds. This is due to the higher liquidity and volatility associated with equity markets. For example, large-cap equity funds may have lower exit loads as they are considered less risky, while mid-cap or small-cap equity funds may have higher exit loads to discourage short-term trading.

On the other hand, debt funds, which invest in fixed-income securities, tend to have lower exit loads as they are relatively less volatile. It is important for investors to carefully review the exit load structure of different mutual fund schemes and align them with their investment goals and time horizons.

Exit Load on SIP

Exit loads in mutual funds also apply to Systematic Investment Plans (SIPs), a popular investment option. A SIP allows investors to invest a fixed amount at regular intervals rather than making a lump sum investment.

The implications of exit loads on SIPs can differ slightly from those of lump-sum investments. While the exit load percentage for SIPs may be the same as that for lump sum investments, the calculation may vary. Exit loads on SIPs are typically calculated based on the number of units redeemed and the applicable exit load percentage at the time of redemption.

This means that if an investor redeems a certain number of units before a specified period, they may incur an exit load on those particular units. Investors should be aware of the exit load structure specific to SIPs and consider it when planning their investment strategy.

Why is Exit Load Levied on Mutual Funds?

Exit load in mutual funds is a fee charged to investors when they redeem or sell their mutual fund units within a specified period. The rationale behind levying exit loads is to discourage short-term investments and promote long-term investment behaviour.

Mutual funds are designed to generate returns over a period of time, and frequent buying and selling can disrupt the fund's investment strategy and performance. By imposing short-term exit loads, fund managers can incentivise investors to stay invested for a longer duration, aligning their interests with the fund's long-term objectives.

This helps maintain stability and liquidity within the mutual fund and reduces the impact of short-term market fluctuations on the fund's overall performance. The purpose of exit loads, therefore, is not only to protect the interests of existing investors but also to ensure the fund's optimal functioning and returns for the benefit of all investors.

Frequently Asked Questions

What are entry and exit loads in mutual funds?

Entry load is a fee once charged for investing in mutual funds, now prohibited by SEBI. Exit load is a fee for withdrawing from a fund, varying by scheme.

What is considered a good exit load for mutual funds?

A "good" exit load is low and aligns with your investment term, minimising costs for early withdrawal. Ideal exit loads are those that match an investor's expected holding period.

What exit load applies to mutual funds without a lock-in period?

Funds without a lock-in period may still charge an exit load if investments are redeemed within a set timeframe, often up to a year. The rate varies per fund's policy.

What does a 1% exit load mean?

A 1% exit load means withdrawing funds within a specified period incurs a fee of 1% of the redemption value, reducing the amount investors receive upon exit.

Which mutual funds have no exit load?

Some mutual funds, particularly liquid and ultra-short duration funds, offer 0 exit load, allowing free entry and exit without fees. This feature is also found in select equity funds, providing liquidity flexibility for investors.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.