In this video by HDFC mutual fund, you will learn the meaning of exit load in mutual fund investments. You will learn how to calculate the penalty you might be charged if you redeem a mutual fund before its maturity date. Do let us know your thoughts in the comments section – are long-term investments in mutual funds worth it?
Mutual funds are a group of investments invested by individuals with the same financial objectives. Managing these funds is not always easy, and this is where Asset Management Companies (AMC) come in.
The role of these companies is to manage the mutual funds and make sure that the investment objectives are being attained. When managing these mutual funds, it is always important for the investors to know the costs associated with their investments, as such expenses and charges directly affect their returns. Some of these costs may be inevitable for the investors as they add value to the mutual fund scheme.
For example, it is usually beneficial if financial experts (AMC) manage mutual funds to generate appropriate returns. Though, this service comes with a fee.
What is an Exit Load?
Exit load can be defined as the fee charged by fund houses (AMCs) when mutual fund redemption is if the investors exit the scheme partially or entirely within the duration specified in the scheme information document. This does not mean that all schemes necessarily charge an exit fee.
The whole point of an exit load is to discourage investors from redeeming their investments before a certain duration. Due to this, the investors who do not want to redeem their investments prematurely don’t suffer because of those who do. An exit load fee can vary from fund house to fund house, though it does not differ exponentially. Before investing, one must understand the exit load structure to plan out their investments.
What is an exit load in a mutual fund?
Any exit load charged from the investors is always credited to the scheme itself and never to the profits of the fund house. It should be noted that the exit load is calculated from the fund’s Net Asset Value (NAV) and not on the actual investment returns. Though the exit load does affect the overall returns of the mutual funds at the time of redemption, it can discourage investors from premature redemption.
Fund houses or AMCs cannot charge any extra fee as an exit load other than the amount specified in the document. Furthermore, any change in the exit load schemes can only be charged on the potential investments in the future, not on the ones already made.
Another interesting observation is that the exit load levied on a mutual fund scheme is different from the lock-in. As the investors are permitted to liquidate their funds once the exit load is levied, they are not allowed to do so during the lock-in period.
The exit load is not included in the expense ratio. Its primary purpose is to reduce the number of mutual fund withdrawals as they will not be charged any exit load if the investors redeem the funds after the duration agreed upon.
The remaining amount gets credited to the investor after a percentage is deducted from the net asset value in an exit load.
Exit loads on the different types of mutual funds
As said earlier, exit loads differ from fund house to fund house and even from mutual fund to mutual fund. Some mutual fund schemes can charge an exit load for an investment period of a couple of years, whereas some levy only for the first week.
- An exit load is not levied on overnight schemes.
- Even though an exit load can be charged on liquid schemes of less than 7 days, the fee decreases as the holding period decrease.
- In the case of debt funds, exit load is generally charged on the redemption if the holding period is between a month to a year.
- In the case of equity funds, exit load is generally charged on the redemption if the holding period is between a year to two years.
How is exit load calculated?
At the fund manager’s discretion, an exit load is always calculated on the net asset value. It is a percentage of the NAV, after which redemption is calculated by deducting it from the NAV.
For example: If an investor has redeemed 2000 units of a scheme with a net asset value of rupees 400 and the exit load is at 2%. The applicable net asset value for redemption will be 2% of rupees 400 deducted from rupees 400 (which is rupees 8 deducted from rupees 400), which is Rs. 392. Thus, the redemption proceeds for the investor would be Rs. 7,84,000 (Rupees 392 multiplied by 2000 units).
Exit Load on SIP
Each investment in SIP is considered a new purchase so it may be charged accordingly depending on the installment amount and the redemption amount.
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