What is Exit Load of a mutual fund and how is it calculated?

Mutual funds are one of the easiest and most cost-effective ways to invest in the stock market. There are many costs that are associated with mutual funds like up-front commission and exit load commission. These charges are directly deducted from the invested amount or on withdrawal of investment. 

The upfront commission is the charge that investors pay when they purchase mutual funds. It is referred to as entry loads in India. Entry load are a percentage of the investment amount that is used to pay the financial advisor or the salesperson who has sold the mutual fund. However, the markets regulator Securities and Exchange Board of India (SEBI) has abolished entry load since August 2009, which means, in India Mutual funds cannot charge upfront costs to an investor at the time of investment. 

Exit load is a minor fee that is charged by the Asset Management Company (AMC) or the mutual fund house when an investor makes a premature redemption. It is used to discourage premature redemption of mutual funds. However, the exit load is not charged on all mutual funds. It is usually charged on open-ended mutual funds to prevent early withdrawals. 

Also Read: Active vs Passive Mutual Fund: The difference you should know before investing

Generally, open-ended mutual funds have a very specific period in which the exit load is applicable to the invested amount. This period can vary for different mutual funds and usually, a percentage of the net asset value (NAV) of the mutual fund that the investor possesses is charged as an exit load. The charged amount and the time when it becomes applicable can vary for different mutual fund schemes.

The exit load details are included in offer documents, the fund’s factsheet for the month in which it is purchased, and the Key Information Memorandum (KIM), which includes the applicable percentage and duration of the exit load period. Investors should read these documents carefully before investing in a mutual fund.

Exit Load Calculation

The exit load becomes applicable when an investor prematurely redeems the mutual fund. The AMC charges the Exit load from NAV and the remaining amount is deposited to the investor’s account. Exit load can be easily calculated. Let’s understand:  

For example, suppose you have invested Rs 50,000 in a mutual fund, which has an exit load of 1% and a NAV of Rs 100. By investing Rs 50,000, you will get 500 units of the fund. 

Now, if you decide to prematurely redeem the 500 units when the NAV of the mutual fund is Rs 110, then the exit load will be charged on the last NAV, i.e. Rs 110. 

The exit load will be calculated as (1% of Rs 110)x500 units = Rs 550. 

The value of 500 units at a NAV of Rs 110 would be Rs 110×500 = Rs 55,000. 

However, in case of premature redemption, Rs 550 will be deducted as an exit load and the balance of Rs 54,450 will be credited to the investor. 

Also Read: Direct Plan vs Regular Plan: The difference you should know before starting SIP in Mutual Funds

Exit load can vary depending on the type of fund or specific schemes. Therefore, it is important to understand what kind of mutual fund the investor buys and the applicable exit charges on those funds.

Equity funds which invest in stocks have the lowest exit charges from 0% to 1% and some equity funds do not have any exit load.

Debt Funds invest in fixed-income instruments like bonds, and debentures. They charge anywhere between 0.5% to 2% as exit load. 

Liquid funds invest in short-term debentures which have very low risk and almost minimal or zero exit cost. So, the investor can redeem their investment whenever they want without any substantial cost.

Hybrid funds usually consist of equity and debt funds. The exit load of these schemes varies depending on the allocation to equity and debt compound in the fund.

Conclusion

Exit Load is an important factor while investing in a mutual fund. It is, therefore, necessary to read the offer document, the fund’s latest factsheet and KIM, which mentions the exit load and lock-in period before purchasing any mutual fund. By consulting a certified financial advisor and proper planning, mutual fund investors can avoid unnecessary exit charges and ensure they meet their financial goals on time.

(With inputs from Nimmagadda Deeraj, an intern with FE PF Desk)

Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.