Understanding Exit Loads in Mutual Funds

When an investor decides to redeem their mutual fund investment, Asset Management Companies impose a fee known as exit load. The exit load is calculated as a percentage of redemption value and differs based on duration. Understanding its intricacies would help investors make informed decisions regarding investment tenure across different types of mutual funds and the cost associated with early withdrawals. 

 

What Is an Exit Load?

An Exit load is also called a redemption fee that is charged by a mutual fund house when an investor redeems the units within a specified period after investing in a mutual funds. This fee is designed to prevent short-term trading and compensate the fund house for the administrative cost associated with processing redemption. It is expressed as the percentage of the amount being redeemed.

 

How to Calculate Exit Load in Mutual Funds

Calculating exit load in a mutual fund is quite simple and based on two different factors.

Total Percentage Charged

It is the percentage of the redemption amount that a mutual fund charges as an exit load.

Exit load period

It refers to the specific timeframe during which exit load applies.

For example, let's say that an investor has invested INR 5000 in a mutual fund that has an exit load of 2 per cent and an exit load period of 90 days. If you decide to redeem INR 3000 then the exit load fee will be calculated as 

Exit load = 2% * INR 3000 = 60 INR

 

Implications of Exit Load for Investors

A few of the implications of exit load for investors are listed below.

Cost of Redemptions

Exit load represent the additional cost to the investors that reduces the overall return on investment. 

Discouragement of Short term trading

Mutual fund house aims to reduce short-term trading activities and promote long-term investing by imposing exit load. The exit load incentivises investors to hold onto their investments for a longer duration. 

Impact on Liquidity need

Exit load impacts investor’s ability to access funds anytime they want. If they want to redeem shares within the exit load period they might need to pay a significant amount of exit load.

 

Exit Loads Across Different Types of Mutual Funds: Debt, Equity, and Hybrid Funds

 

Exit Loads in Debt Funds

Debt funds usually impose an exit load ranging from 0.5% to maximum 2 per cent with a shorter exit load period as compared to equity funds.

 

Navigating Exit Loads in Equity Funds

Equity funds may have an exit load ranging from 1 per cent to maximum 2.25 per cent or more with longer exit load periods, unlike debt funds. 

 

Unpacking Exit Loads in Hybrid Funds: Balancing Risks and Rewards

Hybrid funds offer a balanced approach to risk and return whereas exit load structures offer flexibility. 

 

Conclusion

In conclusion, understanding exit load would help investors not only make informed decisions but also improve their portfolios. Whether investing in equity funds and debt funds or hybrid funds it is necessary to be aware of the exit load structure and duration of the exit load period. For informed investment selections, one can seek the advice of financial professionals or go online for market and fund updates.

 

FAQ

What is the exit load on a mutual fund withdrawal?

An exit load is a fee charged when an investor redeems their mutual fund investments within a predetermined period after purchase.

How does the exit load structure differ between regular and direct plans of mutual funds?

Exit load structure is the same for both regular and direct plans of mutual funds. However direct plans have lower exit loads.

Does the exit load percentage vary based on the investment duration or the amount being redeemed?

Yes, the exit load percentage can differ based on investment duration and the amount being redeemed. There might be additional exit load slabs based on holding periods.

Can I find information about the exit load structure before investing in a mutual funds scheme?

Yes, there is information on the exit load structure available in the mutual fund’s scheme information document and key information memorandum that one can read before investing. 

How does the exit load impact portfolio value of the investor ?

Exit load is deducted during the redemption process and the remaining amount is returned to the investor.

 

Disclaimer

Investors may consult their Financial Advisors and/or Tax advisors before making any investment decision.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY