What Is Exit Load In Mutual Fund?
Learn the meaning of exit load in mutual funds and when it is levied.
One of the most attractive features of mutual fund investments is its liquidity. You can invest in and redeem your mutual fund investments at any time as per your requirements. However, even though mutual funds allow easy and quick redemption, many mutual fund schemes levy an additional charge on early redemption, called exit load. This exit load can eat up a portion of your returns.
Let’s understand the meaning of exit load in mutual funds and when it is levied.
What Is Exit Load In Mutual Funds?
As the name suggests, an exit load is a one-time charge levied by a mutual fund scheme when you make a redemption from the mutual fund scheme before the completion of a specific period after investing. This exit load in mutual funds is expressed as a percentage of the mutual fund’s NAV (Net Asset Value) and is not included in its total expense ratio.
Why Do Mutual Funds Levy Exit Load?
The main reason why mutual fund schemes levy an exit load is to deter you from redeeming your investment in the scheme. This helps the fund house, also known as the asset management company (AMC), retain its investors. The exit load is also levied to protect the financial interest of all the investors in the mutual fund scheme, especially those who choose to remain invested in the fund.
How Is Exit Load In Mutual Funds Calculated?
The exit load is applied at the time of mutual fund redemption and is calculated on the total redemption value. Let’s understand this better with an example:
Assume that you have invested ₹10,000 in a mutual fund scheme and the Net Asset Value (NAV) of the fund at the time of investing was ₹50. This gives you 200 units of the mutual fund scheme. Now, the scheme levies a 1% exit load in case you redeem your money within one year of investment.
Now, if you decide to redeem 100 units of your investment after 5 months of investing, when the NAV of the fund is ₹55, you will have to pay an exit load since you are redeeming within one year of investment. Here is how the exit load will be calculated:
Exit Load On Different Types Of Mutual Funds
You must note that all types of mutual fund schemes do not levy an exit load. Certain funds allow you to redeem your investments at any time without levying any additional load. Such schemes, like liquid mutual funds and overnight debt funds, are highly liquid and do not carry any entry or exit load. On the other hand, since equity mutual fund schemes are largely designed for long-term investments, such funds usually levy a higher exit load as compared to debt funds. The exit load percentage may vary from one fund to another.
So, while you are investing in a mutual fund scheme or if you decide to redeem your investment from a mutual fund, check if the AMC levies an exit load or not. The exit load levied by mutual fund schemes is usually applicable for a pre-specified period after the investment is made. Hence, it is always advisable to try to stay invested in the mutual fund till the period when the exit load is applicable, and then redeem it if needed. This will help you get a higher amount during redemption.