Exit Load in Mutual Funds: Meaning, Types, Exit Load Calculation & More
When you invest for long-term financial goals such as building a fund for a child's higher education or your retirement, it is important to stay invested for a long time till the financial goal is achieved. Mutual fund houses levy the exit load to dissuade investors from redeeming their investments too soon. In this article, we will understand what is exit load in mutual funds, its meaning, types, exit load calculation & more.
What is the exit load in mutual funds?
An exit load is a fee or a charge levied by a mutual fund scheme when you redeem your units, either partially or fully, before a specified period. For example, you invest a lump sum amount of Rs. 10,000 in an equity scheme with an exit load of 1% for redemptions within six months of investment date. In this case, if you redeem your investment either partially or fully within six months from your date of investment, an exit load of 1% will be levied on the redemption amount.
Mutual fund houses levy exit loads to discourage or demotivate or dissuade people from redeeming their investments before a specified time. If investors stay invested in a scheme for a long enough period, it gives a free hand to the fund manager to invest in securities for the long term to generate good returns for the scheme investors. With people staying invested for a long period, the fund manager will not have the pressure of high redemptions.
How is exit load levied?
The exit load is always levied on the redemption amount, not the investment amount. It is levied as a percentage of the redemption amount. As the exit load is applicable on the redemption amount, it doesn't matter whether you have made a profit or loss on the investment. Hence, if applicable, exit load is also payable on loss-making transactions.
The fund house will calculate the exit load amount, deduct it from the redemption amount, and credit the balance amount to the investor’s bank account. The AMC can change the exit load percentage from time to time, although this doesn’t happen frequently.
How to calculate the exit load in a mutual fund?
To know the exit load for redeeming an investment, fund houses or intermediary websites will provide you with an exit load calculator. Let us take an example to understand how the exit load is calculated in a mutual fund.
Rajesh had invested a lump sum of Rs. 25,000 in an equity scheme with an exit load of 1% on redemptions done within six months of investment date. At the time of investment, the net asset value (NAV) was Rs. 10 per unit. Accordingly, Rajesh got 2,500 units.
After three months, Rajesh needs some funds due to an emergency. He submits a request for a partial redemption of 1,000 units to the fund house. The NAV at the time of redemption is Rs. 11 per unit. So, the redemption value will be calculated as Rs. 11,000 (1,000 units x NAV Rs. 11 per unit). On this redemption amount of Rs. 11,000, an exit load of 1% will be levied. Rajesh will be charged an exit load of Rs. 110 (1% of Rs. 11,000).
After deducting the exit load of Rs. 110 from the redemption amount of Rs. 11,000, the fund house will credit Rs. 10,890 to Rajesh’s bank account.
Exit load on various types of mutual funds
Different fund houses have different lock-in periods for various schemes, and accordingly, they can decide the exit load.
Equity-linked savings scheme
- For some schemes, the lock-in period itself is long enough that an exit load is not required. For example, for equity-linked savings schemes (ELSS), there is a mandatory lock-in period of 3 years. The 3-year lock-in period is long enough, so an exit load is not required.
- In the case of liquid mutual fund schemes, there is a lock-in period of 7 days. If an investor redeems their investment within seven days, a graded exit load is applicable as follows.
|Holding period||Exit load|
|Less than 1 day||0.0070%|
|Between 1-2 days||0.0065%|
|Between 2-3 days||0.0060%|
|Between 3-4 days||0.0055%|
|Between 4-5 days||0.0050%|
|Between 5-6 days||0.0045%|
|More than 6 days||0%|
- Fund houses have the flexibility to decide the lock-in period and exit load for equity schemes other than ELSS. The lock-in period usually ranges from 6 to 12 months, and the exit load usually ranges from 0.5% to 1%.
Exit load on SIPs
In the case of the systematic investment plan (SIP) mode, the lock-in period and the exit load apply to every SIP instalment. The investment made through every SIP instalment will be treated as a separate transaction. Hence, each transaction will be subjected to a lock-in period and exit load if redeemed before the specified period.
For example, the lock-in period for a particular equity scheme is one year, and the exit load is 0.5%. Minal starts a 3-year SIP of Rs. 1,000 in the above equity scheme. In this case, the lock-in period (one year) and exit load (0.5%) will apply for each of the 36 SIP instalments of Rs. 1,000.
Mutual fund houses levy the exit load to dissuade you from redeeming your investment before a specified time. But, it is in your interest that you stay invested for the long term. The magic of compounding, specifically in equity mutual funds, works in the long run and can create wealth for you, which will help you accomplish all your financial goals.
To start investing in mutual fund schemes with either low or no exit load, download the Glide Invest App from Google Play Store or Apple App Store and get started.
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