Exit Load in Mutual Funds: Meaning, Calculation and Types

Investing in mutual funds is a way to generate wealth over a period of time. While withdrawing your investments within 1 year you might have thought about the charge that is levied out of your money, this charge is known as Exit load. Exit loads are also sometimes considered as a metric by several investors as they help to decide which mutual fund scheme to invest in depending on their financial goals and investment horizon. So, in this article, we will help you understand the meaning of exit load, how they work and what their purpose is in Mutual funds.

What is Exit Load in Mutual Fund?

They are fees charged by any mutual fund company when their investors withdraw or sell their investments before a specific period. The main purpose of this fee is to discourage the early redemption of units from the fund by short-term traders. By imposing this fee the mutual funds aim to keep stability within the fund and protect long-term investors from the adverse effects of the short-term tradings on the fund.

Suppose you invest Rs. 1,00,000 in a Mutual fund in January which has an exit load of 1%. By May, imagine your investment had grown to 1,08,000 and you decided to withdraw your investment. Since the withdrawal is made before the completion of one year, the exit load of 1% would be applied.

This means, you will have to pay a fee of Rs. 1080 (1,08,000 *1%). Hence, instead of receiving the full amount of Rs. 1,08,000 you will receive only Rs. 1,06,920 (1,08,000 - 1080) after deducting the exit load.

How to Calculate Exit Load in Mutual Funds

To calculate exit loads in mutual funds, you must find the exit load percentage determined by the respective fund house which can change from funds to funds. This data can be found in the mutual fund’s offer document or sometimes even on the facing page of the Mutual fund scheme’s profile if displayed by the broker/intermediary institution. Generally, Mutual funds charge exit loads if the investor opts for redemption within one year of investment.

To understand this better let’s take an example to calculate the exit load in a mutual fund scheme.

Note: The exit load may vary depending on the mutual fund and schemes. As in the case of SIP the exit load is calculated separately.

Types of Exit loads

1. Fixed Exit load:

The exit loads in this scheme would remain the same and constant throughout the investment period. For example, if at the time of investing in a mutual fund scheme, the exit load be at 1%, it will remain constant throughout the period even if the investor redeems the units within 2 months or one year of the purchase.

2. Stepped Exit load:

This is a process where the exit load charge changes in steps over the investment period. The exit load will reduce depending on the time duration an investor holds their funds in the scheme. This method strives to reduce the penalty for early redemption of their investments.

3. Contingent Deferred Sales Charge (CDSC):

It is a structure under which the exit load gradually decreases over time. Although the charges are high in the beginning, as the investor holds the units for longer durations the exit loads decrease. After the CDSC period, exit loads are not charged upon redemption of funds.

Exit Loads on Various Mutual Funds

Each mutual funds charge different rates as exit load charges, but certain mutual funds levy no exit loads on redemption of their investments. It is necessary to check the exit load of the investments before selecting the mutual fund schemes before investing.

Equity Fund: In equity mutual funds, it varies for different schemes but usually around 1% more or less, if the investment is redeemed within 12 months. If you wish to avoid exit loads on equity mutual funds, you must adhere your investment period to the scheme’s time duration

Debt Fund: As in the case of Debt mutual funds they usually, will have an exit load of around 0.5% to 2%  if redeemed within 1 month to 1 year depending on the scheme.

Hybrid Fund: Hybrid Funds like arbitrage funds even charge exit loads for premature redemptions. Usually, they charge exit loads for redemptions within 15 to 30 days. Hence, it is advisable to hold these funds for at least one month or up to the tenure of the minimum holding period.

Read out latest articles “Mutual Fund Houses in India” and “XIRR in Mutual Funds”

Mutual Fund with No Exit Loads

Zero exit load mutual funds are certain mutual fund schemes which do not charge any exit loads on investments. If you want to invest in funds with zero exit loads, Exchange Traded Funds ETFs are one of the options as they do not charge any fees as exit load. Even some debt funds like overnight funds and ultra short durations funds also do not charge any exit loads.

How to Avoid Exit Load in Mutual Funds?

The exit load on mutual funds will be charged if the funds are withdrawn within the minimum duration of the specific mutual fund. To avoid paying this fee, investors should keep their investments for at least the minimum period mentioned in the mutual fund scheme. Hence it is necessary to select the funds for which the exit load and holding tenure align with one’s investment objective depending on short-term or long-term investment. 

Conclusion

In conclusion, it’s crucial to understand exit loads to make informed decisions about mutual fund investments. The early redemption costs serve as a restraint for short-term trading and protect long-term investor’s interests. Hence, ensuring the exit load structure fits your financial objectives is important. You can check out the various mutual fund schemes and their exit loads on the best app for mutual funds, Rupeezy Invest and start your investment journey with us.