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

Do mutual fund schemes have lock-in?

Read my article on the above subject in Mid Day, Gujarati edition today.

Here is the link to the article.

The English translation of the article is as under:

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Lock-in period in a mutual fund

“For how long does my money remain locked in a mutual fund scheme?” or “What is the lock-in period in mutual funds?” Someone asked the other day.

Well, there are many misconceptions floating around in the market regarding mutual funds. The above questions seem to be arising out of these. One of the most ignored misconceptions, yet among the most common one, is that all mutual funds are same. Many people think that all mutual funds have the same features and that they all behave in the same exact manner. Hence, an investor should expect the same experience with all mutual funds. The reality is quite different.

We have time and again highlighted in our previous columns that there are many varieties among mutual fund schemes and that investors have a huge amount of choice from the type of mutual fund schemes to various features among similar schemes.

Today, we would attempt to address the questions asked in the opening paragraph. A lock-in period is an operational feature of many investment options and schemes. Lock-in means the investor cannot access the money, or cannot sell the investment and convert into cash.

Now, certain mutual fund schemes do have a lock-in period, whereas some do not. There are also schemes without lock-in where redemption from the scheme is discouraged by putting some charges.

First of all, there are schemes like ELSS or some of the retirement funds or even children’s funds, which have a lock-in period. In case of ELSS or retirement funds, where the investor can avail of tax deduction by investing in such schemes, there is a statutory lock-in period. After the statutory lock-in period is over, the investor is free to take the money out on any business day or stay invested for as long as one wishes to. You are also allowed to add more money in the same account even during the lock-in period of the earlier investments. However, the new (or fresh) investments would attract lock-in from the day of investments. For example, in ELSS schemes, the mandatory lock-in is for three years from the date of investment. So, your investment made in March 2017 would be locked in till March 2020, but additional investment in the same account in May 2017 would be locked in till May 2020.

The next category we must understand is the close-ended funds. These funds have a defined maturity period. At the end of this period, the funds are automatically returned to the investors. Before maturity period, the investor cannot get the money back from the fund. However, as per SEBI regulations, the units of close-ended funds have to be compulsorily listed on a recognized stock exchange, which may allow liquidity to the investors.

Then come the open-ended funds. In these funds, there is no lock-in period. An investor can buy the units or redeem the funds on any working day. However, in case of some of the open-ended funds, there could be an exit load if the investor exits before a certain period from the date of investment. There are no fixed rules about such periods, and the exit load as well as the period may change for the same scheme from time to time. However, as an investor, you must know that what exit load was applicable at the time of your investment would apply to that particular investment. Any subsequent change in exit load would not be applicable to your old investments.

So, there is no general answer to the questions asked in the opening paragraph. Understand the type of fund and check the fund details at the time of investing.