Understanding exit loads in mutual funds

What is an exit load? How does it affect an investment's returns?

Click here to know the answers...

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The English translation of the article is as under:

Exit load

What is exit load?

Certain mutual fund schemes carry an exit load. This is the charge levied when an investor exits the fund scheme, or redeems the money. However, this charge is levied if the exit is made before a certain pre-defined time period. If the investor stays beyond this period, there is no exit load. Let us look at some examples. Various mutual fund schemes may have exit load structures like this:

(1) 1% exit load if redeemed before completing 1 year; Nil thereafter.

(2) 1% exit load if redeemed before completing 1 year; 0.5% exit load if redeemed after completing 1 year but before completing 2 years; Nil thereafter

(3) 0.5% exit load if redeemed before completing 6 months; Nil thereafter

(The above are only some examples. You may check the exit load applicable in the scheme of your choice.)

Which schemes have exit load?

Close-ended funds and ETFs do not have exit loads. Any open-ended mutual fund scheme can have an exit load. However, normally, liquid funds do not have it. Whereas all other schemes may have exit load, the same is not necessary. There are many equity and debt mutual funds that do not have any exit loads. It is also important to keep in mind that the same scheme may have different exit load structure at different points in time.

Though the exit load may be different at different times for the same scheme, in case of any investment the applicable exit load would be the one that was prevailing at the time of investment and not at the time of redemption.

In case of SIP too, the applicable exit load would be the one that were prevailing at the time of each of the SIP installments and thus, different installments may have different exit loads applicable.

How does this exit load work?

The exit load is charged by adjusting the redemption amount for the same. The amount payable to the investor would be less to the extent of the exit load. Let us see that with a calculation:

Let us assume that the exit load is 1%; NAV at the time of redemption is Rs. 20; the balance in the folio is 25,000 units and the investor has opted for redemption of all units..

In that case, the redemption price = NAV X (1 – exit load)

Redemption price = Rs. 20 X (1 – 1%) = Rs. 20 X (0.99) = Rs. 19.80

Amount received on redemption = no. of units X redemption price

= 25,000 X Rs. 19.80

= Rs. 4,95,000

Consider this amount in relation to the money that the investor would have got in the absence of exit load. (Rs. 20 X 25,000 units = Rs. 5,00,000).

Due to the exit load, the investor got Rs. 5,000 less than the value of investments on the day of redemption. This Rs. 5,000 is the exit load or the exit charge paid.

Then again, Rs. 5,000 is 1% of Rs. 5,00,000.

This is how exit load works.

-       Amit Trivedi