Exit load is deducted from the total sale proceeds to determine the net redemption amount. In simple terms, it is a penalty imposed by the fund house for prematurely exiting the scheme.
On redeeming mutual fund units, the asset management company requires you to pay a fee, especially if you redeem the units shortly after buying them. Exit load is deducted from the total sale proceeds to determine the net redemption amount. In simple terms, it is a penalty imposed by the fund house for prematurely exiting the scheme.
Fund houses impose this charge when an investor redeems either partially or fully the units of their mutual fund within a specified investment period. This period varies from mutual fund scheme to scheme and is calculated from the investment date, whether a lump sum or a systematic investment plan (SIP).
How is ‘exit load’ calculated?
Let’s assume you invested Rs 10,000 lump sum on January 1, 2024, and the exit load is applicable if redemption takes place within the next year. The net asset value (NAV) of the mutual fund at the time of entry was Rs 100, thus resulting in the allotment of 100 units.
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In December 2024, which is less than one year from the date of MF purchase, you decide to redeem 50 per cent of your MF units. Suppose the NAV stands at Rs 150 at the time of redemption, you will be entitled to receive 50 x Rs 150 = Rs 7,500.
Since you’re selling your units before completing one year, the exit load will be 1 per cent of Rs 7,500, which equals Rs 75.
Therefore, the amount you will receive after redemption is Rs 7,500 – Rs 75 = Rs 7,425.
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Types of exit load in mutual funds:
However, exit load charges applied by mutual fund houses vary scheme to scheme. As an investor, you should check the exit load applicable on the particular scheme you are looking to invest in.
Equity funds: Exit load in equity mutual funds is usually kept higher because such funds are structured for long-term investment horizons and fund houses want to discourage frequent redemptions.
Debt funds: Fund houses normally keep exit load fee lower for debt mutual funds than equity funds. There are various debt funds which waive exit load charges completely, such as overnight and most short-duration funds. As these funds are tailored for short-term investment horizons, investors are not charged any exit load fee. There are many other specific types of debt funds, including banking and public sector funds, that do not charge exit load.
Hybrid funds: As the name suggests, hybrid funds are a combination of equity and debt instruments. Hybrid funds, including arbitrage funds, attract exit load if units get redeemed early. For most arbitrage funds, exit load on unit redemptions within a specific period normally ranges from 15 to 30 days. To avoid paying exit load in arbitrage funds, investors should consider holding units for one month or above.
Exit load in mutual fund SIP investment:
In the case of an investor using the SIP route, each installment is treated as a separate investment, and exit load is calculated accordingly from the date of each SIP investment. Exit load rules on SIPs mirror those applicable to redemptions of funds that received lump sum investments from buyers. Each SIP installment must complete a period of one year to avoid the exit load. For example, if you have invested through SIP for three years and seek an exit load-free redemption, you must extend your fund’s duration by an additional year to become exempt from the exit load.
Why is exit load levied?
The purpose behind charging a fee on exit by a mutual fund house is to deter investors from frequent withdrawals, thus limiting the number of mutual fund redemptions by an investor. Exit loads, however, vary among different asset management companies.
Exit loads are commonly charged by almost all equity, hybrid, and debt mutual funds. However, certain debt funds, such as ultra-short duration funds, do not impose any fee upon exiting their schemes. Additionally, many other debt fund schemes, like banking and PSU funds, also do not levy an exit load.
Equity funds, typically launched with long-term investment horizons by any MF house, deliberately impose exit loads on such funds. This strategy is common across actively managed equity funds.
