Exit loads are levied in order to discourage investors from withdrawing money from a fund. The premature exit of a mutual fund investor not only hut his own return but also other investors in the same fund.
All mutual fund houses do not charge exit load.
What is exit load on mutual funds?
An exit load is a penalty levied by the asset management companies to discourage investors from redeeming or exiting from funds before a predefined time. It is also referred to as an exit penalty if the investor quits the fund early or before the lock-in period. This predefined time is called the lock-in time period.
What is expense ratio in mutual fund? Mutual funds company manages a pool of investments collected from individuals & institutional investors. In order to provide this service mutual funds, companies incur costs which are called the Expense ratio.
Exit load is not part of the expense ratio, it is an additional charge as a penalty. Exit load in Sbi mutual fund is 1% if redeemed within 1 year.
Exit load on mutual funds with example
Do all mutual funds charge exit load?
No, all mutual fund companies & their schemes do not charge exit load.
How to calculate exit load on a mutual fund?
Exit load is charged on the NAV (Net asset value) of the scheme. NAV means per unit market price of a unit in a scheme, it is calculated by dividing the total value of all assets minus all liabilities by the total number of outstanding units. It is calculated by the accounting firm hired by the mutual fund company.
Suppose the NAV of a scheme is ₹100 and if an investor exits his investment within a period of 12 months he shall be liable to pay a 1% exit load.
The same investor invested ₹1000 on 1st January 2021 and exited the fund on 31st March 2021 (i.e. within a period of 3 months). He shall be liable to ₹10 (1000*1%) for his early exit.
What is the exit load on different mutual schemes?
Different AMC charges different exit loads of different schemes. It should be kept in mind of an investor to check the exit load as well as the time period adjoined to it.
- Liquid funds carry an exit load, but for a small amount of time as their aim is to provide liquidity to the investor. This means an investor can redeem his units within a few days of his investment.
- Debt funds & Equity funds may or may not have an exit load. But even if it has an exit load, an investor can ignore the expense by adjusting it with the time horizon. For E.g. Exit load for the Axis bluechip fund is units in excess of 10% of the investment, 1% will be charged for redemption within 12 months.
Exit load with SIP.
SIP (Systematic Investment Plan) simply means a route a person can use to invest in security over an interval of time. When means, investing money in an equity mutual fund on an interval of a month for purposes like retirement, child education, dream vacation, etc.
There is a common misconception that if a person is investing for a year (assuming that there is zero exit load if the holding period is more than a year) via SIP in a fund he is not liable for an exit load, which is absolutely wrong.
This means that if an investor would have been investing via SIP from 1st Jan 2020 to 31st Dec 2020.
Exit load will be charged if second-month money is redeemed i.e. Jan month installment will not be charged but any amount more than that will be charged.
For more examples, go here.
Where does the exit load charge go?
Before 2012 exit loads were used by AMC for sales & marketing purposes. But the redemption by an investor before a predefined period would cause losses to other investors in the same scheme.
So in 2012 SEBI (Securities & Exchange Board of India) mandated the charges from the exit load to be transferred back to the respective scheme in order to protect the existing investors from other investor’s premature withdrawals.
When the premature withdrawals take to place an AMC also suffers losses so in order to lower the burden SEBI had allowed to charge an additional 20 basis points to every scheme. However later in 2018 is the 20 basis point charge was lowered to 5 basis points this was done to lower the cost of investing in the mutual funds.
Related Topic: Taxation on equity mutual funds
Example of Mutual funds
Disclaimer:- The below scheme names are just examples, not recommendations.
Debt mutual funds with zero exit load
- HDFC Short Term Debt Fund.
- Principal Cash Management Fund.
- Aditya Birla Sun Life Floating Rate Fund – LTP.
Equity with 0 exit load mutual funds
- Motilal Oswal Long Term Equity Fund.
- Axis Long Term Equity Fund.
- BOI AXA Tax Advantage Fund.
I am not a SEBI registered investment advisor. This article is for information purposes any scheme or company name mentioned here is just for example & not a recommendation.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance of the mutual funds is not necessarily indicative of the future performance of the schemes.