What is Exit Load in Mutual Fund and How it is Calculated?

Investing in mutual fund schemes is easy and free but when you withdraw your funds from such investments, you need to pay certain exit load charges. Mutual funds houses and asset management companies (AMC) levy exit load charges based on different criteria for various types of funds.

Exit load is one of the popular charges in the mutual fund industry you need to know before you invest in such funds. This exit load not only impacts your overall returns from the total investment in such funds but also encourages investors to keep their investments for a longer period. Today we are going to talk about exit load and how it is calculated in the mutual fund industry.

What is Exit Load in Mutual Fund or in SIP?

Exit load in the mutual fund industry is the term used for the charges or fees levied by the AMCs fund houses when investors redeem their investment before the date of maturity. This kind of practice is done to discourage the investor from exiting such investments on a frequent basis and keep their funds as a long-term investment to get lucrative returns.

If you liquidate, your funds in less than one year the rate of exit load charges would be high compared to exit load charges for more than one year. When you sell or liquidate your investment, the exit load charges are imposed on the total value of your redemption amount.

You will get the final amount after deduction from your Net Asset Value (NAV). Fund houses calculate the exit load charges either on NAV or on the final amount as per the criteria and charges applicable to different types of funds and date of maturity of funds.

How to Calculate Exit Load in Mutual Fund?

To calculate the exit load in mutual funds precisely, you should have the crucial information like mode of investment, type of funds and percentage of fund applicable on the redemption of different types of investments like lump-sum funds or SIP. To  understand better, we have illustrated below the calculation of different types of exit loads in mutual funds with examples.

Exit Load Calculation Example:

Suppose the exit load on a lump-sum investment is 1% and if you redeem or liquidate your investment within one year you have to pay the exit load charges on your NAV after deducting the charges you will receive your investment amount in your bank account.

If you want to sell your 1000 units of NAV currently trading at Rs 500, then the total value of your investment would be rupees five lakhs (1000×500). If a 1% exit load charge is levied on redemption on such investment then you will get Rs 4,95,000 (after deducting 1% of 5,00,000).

If you want to calculate the exit load charges using the NAV, then the value of each NAV after deduction of such charges will be Rs 495 translating your total investment value to Rs 4,95,000 (1000 units x Rs 495). In SIP, the criteria to calculate the exit load charges is different from the lump-sum amount due to different modes of investments.

In SIP, investors pay regular amounts to invest in a particular investment scheme or fund. The exit load charges are applied on each installment individually as per the duration of the investment. The exit load charges for an installment  that completes one year will differ, usually being lower, compared to those for an installment that has not completed one year, which is typically higher.

In SIP the exit and load charges are calculated on each instalment as per its investment date and redemption date.  The installment completed one year will not face any exit load charges, hence the exit load charges will be applicable on each installment as per its time duration of investment till the date of redemption. Calculating the exit load on each installment of SIP as per the time completion, the final amount of redemption will be credited into your account.

Exit Loads on Different Types of Mutual Funds

The exit load charges on different types of funds are charged differently. There are three types of most popular funds – equity funds, debt funds and hybrid funds.

Equity Funds: Mutual fund houses and AMCs charge a high percentage of exit load charges on equity funds compared to debt funds. As equity, funds are offered with the objective of long-term investments, and high exit loads discourage the investors from redeeming their premature investments to get better returns and avoid such charges.

Equity funds are meant for long-term investment and under this fund, the entire corpus of investment is done only in the equity or stocks. Hence, most equity funds charge exit loads if investors redeem their investment before the specified period.

Debt Funds: Compared to equity funds, the exit load on the debt funds are lower, even the debt funds are meant for the short-term as well as for long-term investments. In short-term funds, the exit loads would be higher compared to long-term, but still, it is lower than the equity funds.

On debt funds, the exit loads are applicable on an accrual basis, involving the high charges of exit loads on the securities you hold till the date of maturity. The exit load charges on such funds are imposed to encourage investors to keep holding their investment for a longer period or till the date of maturity to enjoy the high-interest income and avoid the short-term fluctuation in interest rates.

Hybrid Funds: Hybrid funds are a mix of equity and debt funds, and arbitrage funds charged with exit loads. However, the redemption of arbitrage funds is very short and the exit loads are charged on these funds if they are redeemed within 15-30 days. But there are long periods of up to one year of arbitrage funds on which usually no exit loads are charged.

How to Avoid Exit Load in Mutual Funds?

The best way to avoid exit load charges is to invest your funds in lump-sum or SIP  based funds for long term  or untill they reach maturity, if possible. The main purpose of investment is to get good returns, and in the short term, it is not possible that you may  get a stable return. Hence, mutual fund companies and AMCs impose exit load charges on premature withdrawals.

Apart from that, to avoid the exit load factor on your return on investment you should choose the right funds having the lowest exit load charges and keep yourself well informed about such charges and its structure with holding period to get best returns on your investment. Redeem your funds wisely with planning when no exit load is applicable in such redemption.

Summing-up  

Exit load charges are simply the type of fees or charges levied by the mutual fund houses or AMCs on the redemption of premature funds or before the date of its maturity. Usually, funds redeemed within one year or before the maturity date as defined by the fund houses are subject to exit load charges. On lump-sum investment, the exit load is charged on the NAV or total value of the investment you have applied for the redemption.

While in SIP, the exit load is applied as per the duration of each installment paid for investing in the SIP scheme. The different types of funds equity, debt and hybrid all are eligible for the exit load if the fund is withdrawn before the defined period. To minimize the impact of exit load always choose the right fund charging minimum exit load charges on such investments. The best way is to stay invested for a long period or till the date of the maturity of the fund scheme.

• Author: Religare Broking
• Last Updated: November 26, 2024