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Exit Load In Mutual Fund

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Exit load is assessed when an investment is redeemed or transferred between plans. A mutual fund will charge an exit load to an investor who redeems or sells fund units within a certain time period. It's meant to cover the costs of handling withdrawals from the fund and stop people from trading in the short run. Exit fees are shown as a percentage and reduced while paying out the redemption proceeds to the investor.

What is An Exit Load In Mutual Funds?

What is exit load in mutual funds: Exit load in mutual fund is a fee mutual funds charge investors when selling or redeeming their units. It is based on a percentage of the redemption value and is used to deter investors from making premature withdrawals

Mutual funds' rupee cost averaging and exit load:

When investors think about selling units before a predetermined holding period ends, exit load becomes important in rupee cost averaging. If there is an exit load, it might change the total cost and benefits of the financial plan.

Considerations:

Exit Load time: Exit loads often apply during a specified holding period. Investors should know these time periods and the corresponding exit load percentages. Investments made over longer periods may have reduced or no exit loads.

Effect on Returns: Exit loads impact the total returns investors get. Investors must consider these expenses when assessing the return on their mutual fund investments.

How exit load is calculated

Now that you have understood what is exit load in mutual fund, let’s look at what you require to calculate it:

Percentage of redemption value: Exit load is levied as a percentage of the net asset value (NAV) of the units being redeemed. The applicable rate and time period are mentioned in the scheme’s offer document (Scheme Information Document or SID).

Holding period: Whether the exit load applies depends on how long the investment is held. Funds specify a time frame during which redemptions will attract a charge. Redemptions made after this period usually do not involve an exit load.

NAV on redemption date: The exit load is applied to the NAV on the redemption date. It is not based on the NAV at purchase or the original amount invested.

Example of calculation:

Suppose an investor has:

  • 1,000 units in a mutual fund
  • An exit load of 1% for redemptions made within 365 days
  • A redemption made after 6 months (i.e., within 365 days)
  • NAV on redemption day is Rs. 50 per unit

The calculation would be:

  1. Total redemption value: 1,000 × Rs. 50 = Rs. 50,000
  2. Exit load amount: 1% of Rs. 50,000 = Rs. 500
  3. Net amount credited: Rs. 50,000 − Rs. 500 = Rs. 49,500
  4. 1,000 units in a mutual fund

For Systematic Investment Plans (SIPs):

Each SIP instalment is treated as a separate purchase, and the exit load period is counted individually from the date of each instalment. The "first in, first out" (FIFO) method is commonly used during redemption. This means the earliest purchased units are assumed to be redeemed first. Some earlier instalments may not attract an exit load, while more recent ones could, depending on whether they fall within the exit load period.

For investors to make informed choices on whether or not to invest in a fund or withdraw from a fund, they need to have a solid understanding of the exit loads associated with mutual funds. Their total earnings and investment plan should be considered when determining how these burdens may affect them.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

 

The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.

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