InvestorQ : Is there an exit load on mutual fund?
Rohan Bhadani made post

Is there an exit load on mutual fund?

Answer
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2 years ago


Yes, there exists an exit load on most mutual funds. As the name suggests, an exit load is a penalty levied on a mutual fund if an investor withdraws (redeems) the money (units) from the fund within a certain period of time.

Exit loads are levied on redemptions by the mutual fund company to discourage investors from jumping in and out of schemes. Exit loads are charged as a small percentage of the net asset value (NAV) that exists at the time when you are selling your units.

Usually, the exit load for equity funds is 1% of the withdrawn units if it is withdrawn in less than 1 year and zero thereafter. Debt funds have a similar exit load, but the load period is usually three years.


Exit loads are calculated differently for SIPs and lump sum investments.

Here’s how exit load is calculated for a lump sum investment:

Say you are selling 500 units of an equity scheme you purchased four months ago. The scheme charges an exit load of 1% if you redeem it units before one year.

Let’s assume the NAV is Rs. 100. So, you will get Rs. 99 per unit [Rs. 100 – Rs. 1 (1% of 100)] on redemption. The total amount which you will get will be Rs. 49,500 (Rs. 99 multiplied by 500 units). This means you have paid an exit load of Rs. 500 at the rate of Rs. 1 per unit.

Here’s how exit load is calculated for an SIP investment:

Investors mistake SIP investment’s exit load and calculate the date from the first SIP date. However, this is a cardinal sin because SIP, by the virtue of its recurring nature, means that units are added every month. Thus, the holding period for all units vary as they were bought on different dates.

Let’s assume you have invested in an SIP mutual fund scheme from January to June 2016 and you sold the scheme on March 10, 2017 at an NAV of Rs. 110. The scheme charges an exit load of 1% if the units are withdrawn before a year.

SIP date                    

Number of units purchased

7 January 2016

20

7 February 2016

18

7 March 2016

17

7 April 2016

19

7 May 2016

21

7 June 2016

20

Total

115

 

Total units that have been held for more than one year: 55; purchased in January - March 2016). Hence, no exit load is applicable
Total units that have been held for less than one year: 60; purchased in April - June, 2016). Hence, exit load is applicable on these units.
Exit load payable: Rs. 110 NAV multiplied by 1% (1% of NAV at redemption) multiplied by 60 units (Units redeemed in less than 1 year) = Rs. 66
Amount you get on redemption of 115 units: Rs 12,584 [(Rs. 110 NAV multiplied by 115 units) – (Rs. 66 Exit load applicable)]

As exit loads vary across mutual funds, hence investors are asked to read and understand the fund details carefully before investing.

Hope this clears all your doubts on exit loads!