An exit load is applicable on redeeming your investment in the case of many mutual funds. You might have read about it when investing and casually ignored it. Though it should not be a major factor in affecting your investment decision, you should know about it.
What is exit load?
Exit load is a fee charged when you redeem your investments from a mutual fund.
Whenever you decide to sell the units of mutual funds you own, an exit load may or may not be charged to you.
The exit load is calculated as a percentage of the amount being redeemed. For example: Let’s say the amount being redeemed is ₹1 lakh. And the exit load is charged at 1%. So, the exit load payable by you is:
Total Exit Load=(Rate of exit load) X (Redeemed Amount)
or, Total Exit Load=(0.01) X (100000) = ₹1000
Why is exit load charged?
Exit load is charged to compensate for your early withdrawal from the fund.
A mutual fund expects you to stay invested for a long duration.
If too many people redeem their money from mutual funds, the mutual fund manager’s decision making is affected as the instability is too high.
Not only that, the investment of other investors also get affected. Therefore, it is in the interest of the mutual fund and long-term investors to discourage people from redeeming too soon.
The exit load is meant to act as a discouragement to people who wish to withdraw their money from a mutual fund.
The exit load is mostly higher for short durations and lower for longer durations. In most cases, after a certain period of time, there is no exit load applicable.
Let’s take the example of Quantum Long-Term Equity Fund. If redeemed between 0 and 180 days from investment, the exit load is 4%. If done between 180 and 365 days, it is 3%. Redeeming between 365 and 545 days, the rate applicable is 2% and redemption after 545 days attracts 1%.
Unlike the above, most equity mutual funds charge around 1% if redeemed within a year of investment. No exit load is applicable after that. An example of one such fund is ICICI Prudential Focused Bluechip Equity Fund.
Many mutual funds have no exit loads too. IDFC Banking Debt Fund is one such fund.
Should I invest in mutual funds without exit loads only?
No. Avoiding exit load mutual funds will prevent you from choosing good funds.
When investing, there are various factors besides the exit load you must consider. Exit load isn’t one of the primary factors to consider. Read how you should choose a mutual fund.
Mutual funds do a wonderful job of handling and guiding your investments. If you want to invest in mutual funds for the short term, you should invest in debt mutual funds.
These mutual funds have lower returns as compared to equity mutual funds but they are also less risky.
Debt mutual funds usually either have exit loads applicable for very few days or have no exit load entirely. Birla Sun Life Savings Fund is one such debt fund. It has no exit load.
Equity mutual funds invest in equity which is very volatile in the short term but is considered much more stable in the long term.
They are also able to give good returns in the long term. Such funds usually have an exit load of 1% if redeemed within a year of investment and none after a year.
SBI Bluechip Fund is an example of a fund that has 1% exit load until one year from investment and none after that.
How is the exit load calculated in case of SIP?
The exit load is applicable based on the time duration of each individual month’s investment.
In case you have invested in a mutual fund via SIP, each and every month’s investment is treated separately. Here’s an example to demonstrate this better.
Let’s say you had a SIP set up to invest in Reliance Top 200 Fund. Let’s also assume you invested for 24 months and now you want to redeem.
The exit load of this fund is 1% for less than one year and 0% thereafter. So, a 1% exit load will be calculated upon the last 12 month’s SIP and no exit load will be applicable on the SIP payments you made before that.
What is done with the money paid as exit load?
It is added to the fund for reinvestment.
Earlier, mutual funds made use of the money received from exit loads to fund activities like marketing, operations, and so on.
In 2012, Sebi mandated that money received from exit loads should be put back into the fund to be reinvested. Which means, earlier the money was spent by the mutual fund, whereas now, the money becomes an asset of the investors who are currently invested in the mutual fund.
When choosing a fund, the exit load should not be a very big concern. Whenever you are planning on redeeming your investment from a mutual fund, plan it according to the exit load.
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