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- Redemption of mutual fund investments before a year can lead to exit loads
- How are Exit Loads Calculated - Let’s read this post to know the same
When you invest in mutual funds, it is important to be aware of certain commonly used terms such as exit loads. This has a bearing on your investing experience, so it is important to be fully aware of important terminologies to avoid negative surprises later. Let us know more about what is an exit load and how it is calculated.
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What is an Exit Load?
An exit load is a charge or a fee you pay when you withdraw your money from a mutual fund scheme. It is somewhat like a foreclosure fee you pay when you prematurely withdraw your fixed deposit from a bank. Different funds have different exit loads, there are some funds where there is no exit load as well. Before investing, it is important to check the expense ratio (cost of investing in a fund) and the exit load of a fund. Generally, most open-ended equity funds carry an exit load of 1% if you withdraw your funds within a year from investment. There are some open-ended equity funds that do not charge any exit load. ELSS or tax-saving schemes have a lock-in of three years, and after the completion of 3 years, you can withdraw your entire money without paying any exit load. Debt funds have lower exit loads as compared to equity funds, so do check these out before investing.
How is Exit Load Calculated?
The calculation of an exit load can be explained through this example. Say you make the following investments on these dates in a mutual fund scheme that has an exit load of 1% if withdrawn within a year:
- INR 10,000 invested on 1st February 2019
- INR 20,000 invested on 14th March 2019
- INR 15,000 invested on 25th June 2019
So, you have invested Rs 45,000 in three tranches and then you redeem your entire money on 5th June 2020. Assuming the market value of your investments is INR 47,500 on 5th June 2020. In this case, the market value of the first two investments of INR 10,000 and INR 20,000 will be exit load free or no exit load will be charged since these have completed a year. However, the third investment of INR 15,000 made on 25th June 2019 will have to bear an exit load since it has not completed 1 year. Let us assume this INR 15,000 has grown to INR 15,500. The exit load on this investment will be 1% of 15,500 i.e. INR 155. This INR 155 will be deducted from INR 47,500(market value of 45,000) and INR 47,345 will be credited into your bank a/c.
Why is Exit Load Deducted?
Mutual fund companies deduct exit load as per guidelines from the regulator i.e. SEBI. Though mutual fund companies are free to introduce and remove exit loads, they need to issue an addendum informing all unitholders. Exit load is deducted by the mutual funds to promote long term investing and avoid premature withdrawals. Mutual funds are a long term investment option and withdrawing too soon can be detrimental to the rationale of investing in mutual funds.
One should check the exit load of a fund before investing and when withdrawing. Also, avoid paying an exit load as an additional cost by investing for a longer period.