What is Exit Load in Mutual Fund?

Exit Load in Mutual Fund

If you are someone wanting to start off an investment journey, you will come across people suggesting you to go for mutual funds. They are absolutely right! Before going for this investment type, it is of utmost importance to gain enough insights so that you can make correct investment decisions. Indeed, people are now aware about the mutual funds. This is because of the recent advertisements explaining their advantages.

Mutual fund means an investment vehicle made from pooling money from different investors having the same investment objective. Primary purpose is to invest in financial securities including stocks, bonds, and other asset classes. This investment vehicle is operated by professionals known as money managers or fund managers.

Investing in equity mutual funds means getting exposure in equity markets. Therefore, returns in mutual funds can be volatile. This means it is important to liquidate the holdings when an opportunity arises. Adequate and regular monitoring of the investments is extremely important. Liquidating the units of mutual fund means booking profits. However, there are certain considerations which are required to be made before booking profits.

One of them is exit load. This is a fee charged by the mutual fund companies if investors exit a scheme partially or fully before certain period from the investment date. However, there are schemes not charging exit load. The rationale behind charging exit load is to discourage investors from redemption before a certain period of time. This is mainly done to safeguard the financial interest of all investors in the scheme, principally the ones who decide to stay invested.

Different mutual funds houses levy different fees for different schemes. Some investors decide to invest for the short term. They should go for the schemes without any exit load.

The fee is a percentage of NAV of mutual fund units held by investors. After the mutual fund house deducts the exit load from the total NAV, the amount gets credited to the account. Let us consider an example relating to this. The exit load is 2% in a scheme, which will be levied if an investor redeems before one year. An investor redeems it within six months, much before the agreed period of investment.

If the scheme’s NAV is INR30 at the time of redemption, then the exit fee would be 2% of INR30, which comes out to be INR0.6. Now, the payment to the investor will be made at INR29.4. However, if an investor completes the agreed period of investment, then exit load will not be charged.

Mutual fund companies levy exit load on a range of equity, hybrid and debt funds. However, some debt funds, such as overnight fund and ultra-short-term funds do not carry any exit load. Mutual fund companies levy higher exit loads in the case of equity funds in comparison to debt funds. This is because equity funds are meant for long-term investment tenures. There are some actively managed equity funds charging exit loads.

Investors should always be aware about the exit load or any fees of a scheme before they go ahead for investments. It will be wrong to assume that the exit load period is always 1 year. Investors are advised to read the scheme information documents to know about the exit load and other information about the scheme so that informed decisions are taken.

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