The majority of new investors are observed asking this question – “What is an exit load in mutual funds?”
If a mutual fund has an exit load, it’s important to understand what it is and why it exists. Exit load is when a person pays a fee to redeem their fund shares before the end date of the specified term. This can significantly reduce their returns on the mutual fund, particularly if they invest in equity mutual funds.
This article will go over the exit load in mutual funds.
What is Exit Flow in Mutual Funds?
Similar to the loading charge levied at the point of purchase, the exit load in Mutual Fund is a fee levied by all mutual fund companies if investors exit an ongoing scheme partly or completely within a specific time frame from the day of investment commencement, as indicated in the provided Scheme Information contract.
Now, what is exiting a mutual fund mean? Exiting a mutual fund happens when an investor decides to redeem some or all of his or her fund units and withdraw money. Now that we have established what is exiting a mutual fund really means, it is important to know that there are some plans that impose no exit fees.
To dissuade investors from withdrawing cash before a specified time frame, mutual funds levy an exit fee. This is intended to preserve the financial interests of all plan investors, particularly those who remain committed. As an exit fee, various mutual fund firms impose varying fees for various plans. If a person intends to participate in a mutual fund for a short period of time, they should grasp the plan’s exit load amount so that if they do decide to make a withdrawal, they know exactly how much they have to pay to get that amount.
How to Calculate Exit Load?
Now that it is clear what is exit load in mutual fund schemes is, let’s move forward to know how to calculate the exit load. The amount of exit load in mutual funds depends heavily on the type of mutual fund a person has chosen. One can find a declaration of this exit load on the scheme information paperwork. Different types of mutual funds impose different types of exit loads for partial or complete withdrawals.
Here are examples of how a person can calculate exit loads on a mutual fund.
Let’s say Mr A invested Rs. 50,000 in an equity mutual fund plan in June of 2022. The scheme information documents say the plan imposes an exit load of only 1% if the investor decides to redeem before a period of 12 months. The Net Asset value is Rs. 100. Therefore, Mr A has a total of 500 units. Now, in October 2022, Mr A faces an emergency financial deficit, and he wishes to redeem all his units. The Net Asset value at that point is Rs. 90
In this case, since he redeems his units before the set tenure of 12 months, his exit load will be calculated as follows:
|Total Amount Invested||Rs. 50,000|
|NAV declared at the point of investment||Rs. 100|
|NAV declared at the point of redemption||Rs. 90|
|Exit Load||1% of Rs. (90 x 500) = Rs. 450|
|Redemption Amount||Rs. (500 x 90) – 450 = Rs. 44,550|
Now, let’s say Mr B invested Rs. 50,000 in two equity mutual fund plans in June of 2022. He invested Rs. 23,000 in a plan with a Net Asset value of Rs. 100 and the rest of Rs. 27,000 in another plan with a Net Asset value of Rs. 90. Both schemes impose a 1% exit charge if redeemed prior to a year. Now, he wishes to redeem 300 units divided equally between both schemes in October of 2022. The Net Asset value of both plans sits at Rs. 100 and Rs. 110, respectively.
In this case, since he redeems his units before the set tenure of a year, his exit load will be calculated as follows:
|Total Amount Invested||Rs. 23,000|
|NAV declared at the point of investment||Rs. 100|
|NAV declared at the point of redemption||Rs. 100|
|Exit Load||1% of Rs. (100 x 150) = Rs. 150|
|Redemption Amount||Rs. (100 x 150) – 150 = Rs. 14,850|
|Total Amount Invested||Rs. 27,000|
|NAV declared at the point of investment||Rs. 90|
|NAV declared at the point of redemption||Rs. 110|
|Exit Load||1% of Rs. (110 x 150) = Rs. 165|
|Redemption Amount||Rs. (110 x 150) – 165 = Rs. 16,335|
|Total Exit Load||Rs. 150 + 165 = Rs. 315|
|Total Redemption Amount||Rs. 14,850 + 16,335 = Rs. 31,185|
Exit Loads as per Different Mutual Fund Types
On different equity funds, hybrid funds, and debt funds, the exit load in mutual funds defers similarly to the amount of loading charge at the time of purchase. Some debt funds, such as overnight mutual funds as well as many other short-duration mutual funds, do not levy mutual fund exit charges. Aside from these short-duration mutual funds, many plans in specific types of debt mutual funds, such as Banking & PSU mutual funds, Gilt mutual funds, and others, do not levy an exit cost. Debt funds that adopt an accrual-based investing approach typically charge larger exit charges since they prefer all the investors to stay commented to their investments until the assets mature in order to decrease risks of interest rates.
Since equity funds are designed for longer investment routes, equity mutual funds often charge greater exit fees than something like debt funds. Exit loads are typically charged by actively managed stock funds. Nevertheless, some index funds don’t impose exit fees. If a person wishes to invest in equities funds while avoiding exit costs, they can accomplish so through ETFs or Exchange Traded Funds, which again do not impose exit charges. Whether one chooses to participate in a no-exit load mutual fund plan or not, keep in mind that equity mutual funds are intended for a longer investment tenure and so invest appropriately.
Exit fees are charged by hybrid funds, particularly arbitrage funds, for premature withdrawals. Most investors believe that arbitrage mutual funds are only suitable for short-term investments, such as overnight funds, so they do not charge any amount of exit load. Several arbitrage funds, in actuality, levy exit charges for withdrawals within the time frame of 15 days to 30 days. As a result, arbitrage mutual funds ought to have investment tenures of one month or more.
Hopefully, this article answers the question – “What is an exit load in mutual funds?”
Basically, all mutual funds have some kind of exit load if you redeem your investment before it reaches a specified term. If you are interested in a fund, you should keep both the amount loading charge and exit load in mind. Since the exit load is quite a good amount, you should only invest if you are sure that you will not want to redeem at any point during the specified term. For more details, visit Moneyfy website.