Are there any advantages of investing in funds with an exit load?

While selecting a mutual fund scheme, investors often evaluate factors like past returns, fund management team, portfolio composition etc. However, most investors fail to account for the exit loads charged by some mutual fund schemes. Exit load is a fee charged when an investor redeems units from a mutual fund before a specified period. So, does investing in exit load funds offer any potential benefits? Let’s find out.

Table of contents

• What is an exit load?
• Advantages of investing in funds with an exit load
• Common concerns about investing in funds with an exit load
• When should you consider funds with exit load?

What is an exit load?

An exit load is a fee imposed by mutual fund companies when investors redeem their units before a set period.

The exit load is usually a percentage of the amount being redeemed. The exit load period depends on the type of fund and its investment duration. It can range from a few months to a year or more.

Not all funds have exit loads. Some funds, especially debt mutual funds with low durations, are meant to be highly liquid and typically do not have an exit load.

Advantages of investing in funds with an exit load

The key advantage of investing in a mutual fund with an exit load is that it discourages short-term trading. Investors also benefit from the fund manager being able to stick to a long term investment strategy without having to alter investments frequently to manage liquidity.

A lower portfolio turnover coupled with growth in assets can aid in better fund performance over a long horizon. Moreover, exit loads discourage large scale redemptions from the fund during market downturns. This provides relative stability and ensures that the fund does not have to conduct fire sales of its assets to meet redemption requirements; the fund can strategically exit investments over an optimal period.

Therefore, exit load fund advantages include lower transaction costs for the fund. There are clear advantages of investing in exit load funds from a fund stability and performance perspective.

Common concerns about investing in funds with an exit load

While exit loads offer benefits, some investors are apprehensive about locking their investments for longer tenure. There is uncertainty whether short term needs may arise requiring premature withdrawal from the fund. Investors also fear missing out on profit booking opportunities that may come along during market rallies.

Another concern is that funds with high exit loads may underperform as fund managers may get complacent without fear of redemptions. However, this risk is mitigated to an extent by investors doing thorough research before selecting a reputed fund. A high exit load beyond a reasonable limit can also deter investors from considering the fund at all.

Additionally, investors may have to pay exit loads even for Systematic Withdrawal Plans or STPs which may be part of retirement corpus or kids' education planning. This can significantly impact planning for one’s objectives.

When should you consider funds with exit load?

You may consider funds with exit loads if:

You have a long-term investment horizon: Exit loads are less of a concern for long-term investors who plan to stay invested for more than a year.

The fund category aligns with your goals: Many equity-oriented funds may have an exit load. However, if you seek long-term growth potential, such a fund may be more suitable for you than funds that offer lower return potential, even if they don’t have an exit load.

You understand the implications: You are aware of the exit load charges and their potential impact on your returns.

Conclusion

While evaluating mutual funds, investors must analyze exit load structures to determine if they are investor-friendly. A reasonable exit load if redeemed before 12-15 months is generally acceptable. This enables investors to enjoy the benefits of disciplined long term investing. However, an excessive exit load for short holding periods is a red flag. Investors must assess their liquidity needs and risk appetite before parking funds in exit load schemes to optimize their mutual fund investing experience and fully realize the mutual fund exit load advantages. Additionally, using tools like the SWP mutual fund calculator can assist in planning withdrawals more effectively, ensuring that financial goals are met without exhausting the investment too quickly.

FAQs:

What is an exit load?

An exit load is a fee charged by a mutual fund scheme when an investor redeems units before a specified minimum holding period. It is expressed as a percentage of redemption value. For example, a 1% exit load on redemption before 1 year.

How does an exit load benefit investors?

Exit loads discourage short term trading which reduces fund transaction costs and helps fund managers invest for the long term. This can aid overall fund performance and benefit long term investors. They also provide relative stability to the fund during market downturns.

Are there any disadvantages of investing in funds with an exit load?

Yes, exit loads reduce investor liquidity and limit the ability to book profits or redeem units to meet unforeseen needs. High exit loads can deter investors. Exit loads are payable even on STPs/SWPs which can impact retirement planning.

What is a good exit load for a mutual fund?

The lower the exit load, the better it would be for an investor. There is no inherently ‘good’ exit load amount and most companies would charge comparable rates.

Is exit load charged after 1 year?

Generally, in India, exit loads for equity mutual funds are typically charged if you redeem your investments within 1 year from the date of purchase. Specific structures vary; some funds may reduce exit loads over time or apply different rules. Always review the fund’s terms or consult a financial advisor for precise details and guidance.

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.