Mutual funds are the most common means by which individuals invest and make their money grow. However, when you want to withdraw or redeem your funds from a mutual fund, you may be told about something called an exit load in mutual funds . Your first impression of this term may be that it sounds complex or technical, but do not worry!
In this blog, I will break down all about exit load in mutual funds . By the end, you will be able to calculate exit load in mutual funds yourself, why it is important, and how it affects your returns.
What is Exit Load in Mutual Funds?
Consider the exit load in mutual funds as a minimal charge you incur when you withdraw your cash from a mutual fund prior to a given time. Asset Management Companies (AMCs), or houses, impose Exit load in mutual funds to deter investors from redeeming too early. The plan is to make you hold on and let your money grow, and this smooths the operation of the fund for all the investors.
Example: Suppose you invested in a mutual fund with an exit load of 1% if redeemed within one year. If you withdraw before one year, you will pay this fee. If you wait for one year or more, the fee is usually zero!
Key Terms You Should Know:
- NAV (Net Asset Value): The price of one unit of a mutual fund at any given time.
- Redemption: When you sell or withdraw your mutual fund units.
- Holding Period: The minimum time duration you should ideally keep your money invested to avoid the Exit Load in mutual fund.
- Exit Load Percentage: The percentage of the redemption value that will be deducted as a fee if you redeem early.
Exit Load in Different Categories of Mutual Funds
| Mutual Fund Type | Typical Exit Load Period | Typical Exit Load Percentage |
| Equity Funds | 1 year | Around 1% if redeemed before 1 year |
| Debt Funds | 3 to 6 months (varies) | Usually 0.5% to 1% |
| Liquid Funds | Usually 7 days or less | Varies; sometimes 0.2% for early withdrawal |
| ELSS (Tax Saving Funds) | 3 years lock-in period (No exit load but can’t redeem) | No Exit Load (lock-in) |
Note: The rates vary, so always check your fund’s documents.
Types of Exit Loads
There are a few types you might see:
1. Fixed Exit Load
This is the most common. For example, 1% if redeemed within one year.
2. Graded Exit Load
Some funds have different percentages for different time frames. For example:
- 2% if redeemed within 6 months
- 1% if redeemed between 6 and 12 months
- 0% after 1 year
3. Contingent Deferred Sales Charge (CDSC)
Rare, mainly in international funds; the fee reduces as you stay longer.
Why Do Exit Loads Exist?
Exit loads exist for a few key reasons:
- To discourage short-term trading.
- To protect the interests of long-term investors.
- To minimize disruptions and extra costs for the fund caused by sudden withdrawals.
If everyone keeps withdrawing money frequently, fund managers have to sell assets quickly, which could reduce returns for all investors. Exit load in mutual funds help avoid this.
Exit load in mutual funds is charged only if you redeem (withdraw) before the minimum holding period set by the fund. The holding period and percentage depend on the specific mutual fund scheme. Always check your fund’s documents for the rules.
How to Find the Exit Load for Your Fund?
Check the:
- Scheme Information Document (SID)
- Key Information Memorandum (KIM)
- Fund’s fact sheet or official website
Look for the exit load or redemption fee.
Step-by-Step: How to Calculate Exit Load in Mutual Funds
Let’s make this super simple:
Step 1: Identify Exit Load Percentage
Find out what percentage the fund charges as an exit load.
Step 2: Calculate Redemption Amount
It is the sum you will receive by multiplying the number of units you are redeeming by the Net Asset Value (NAV) at redemption time.
Redemption Amount = Number of Units Redeemed × NAV at Redemption
Step 3: Compute the Exit Load Amount
Exit Load Amount = Redemption Amount × Exit Load Percentage
Step 4: Calculate the Final Amount You Will Receive
Final Amount = Redemption Amount – Exit Load Amount
Illustrative Example
Suppose you want to redeem 500 units, and the NAV is ₹100. The exit load is 1%.
Redemption Amount:
= 500 units × ₹100
= ₹50,000
Exit Load Amount:
= ₹50,000 × 1%
= ₹500
Amount You Receive:
= ₹50,000 – ₹500
= ₹49,500
Another Example with Changing NAV
Let’s say you invested ₹50,000 at a NAV of ₹100, so you got 500 units. After a few months, the NAV becomes ₹90, and you redeem all units. The exit load is 1%.
- Redemption Amount = 500 × ₹90 = ₹45,000
- Exit Load Amount = ₹45,000 × 1% = ₹450
- Amount You Receive = ₹45,000 – ₹450 = ₹44,550
Exit Load for SIP Investments
You have invested in Exit Load in mutual funds with a Systematic Investment Plan (SIP). You must have wondered how the Exit Load in mutual funds will be applied. And the answer is a simple one: exit loads differ based on the type of mutual fund you are investing in.
Equity Funds
Equity mutual funds are meant for long-term wealth generation. In order to prevent investors from selling early, the majority of actively managed equity funds carry an exit load if you sell within a specified time frame, typically one year.
For example, if you take out your SIP units before the one-year gap, you might have to incur around 1% exit load. Certain passive funds, like index funds and ETFs, though, never charge any exit load in mutual funds and hence are more appropriate for short-term investors.
Debt Funds
Debt mutual funds have lower or no exit loads than equity funds. The concept is to keep them liquid and handy, as debt funds are often utilized for near-term objectives such as parking emergency funds or cash flow management.
Options such as overnight funds and ultra-short duration funds typically do not charge any exit load. However, some debt funds with marginally higher durations (such as corporate bond funds) can impose a small exit load if they are redeemed prematurely.
Hybrid Funds
The hybrid funds invest in both equity and debt, which is a combination of instability and stability. These funds can come with an exit load when you take the money out before a holding period, usually of 6-12 months.
For example, arbitrage funds typically have an exit load for redemptions within 30–90 days. This keeps investors invested for at least a short term to derive the advantage of the strategy.
The Importance of Exit Load in Mutual Funds
Exit Load is crucial because it directly impacts your investment decisions and the overall health of the fund. Now, let us understand why this is important.
1. Building Investor Commitment
Exit Load serves as a soft reminder that mutual funds are long-term investments. By deterring instant withdrawal, it makes sure that the investors remain committed and do not view mutual funds as a trading instrument in the short term.
2. Minimizing Market Volatility
If investors constantly buy and sell, it puts undue pressure on the market and the fund. Exit Load prevents this by discouraging constant entries and exits, which ultimately makes the fund less volatile and keeps it stable.
3. Keeping Fund Managers Focused
In the absence of an Exit Load, fund managers would be continuously facing investors withdrawing and adding money. This would compel them to shift their investment strategy repeatedly. Exit Load provides them with elbow room to work towards the long-term objectives of the fund rather than get anxious about short-term ups and downs.
4. Giving Thoughtful Decisions
When investors understand that they will lose some amount of money if they withdraw early, they don’t withdraw impulsively. This leads to well-thought-out, good decisions instead of emotional withdrawals.
5. Preserving Fund Stability
A single large withdrawal can upset the whole equilibrium of a fund. Exit Load serves as a safeguard by preventing mass redemptions and keeping the fund smoothly operating.
6. Aligning with Fund Objectives
Each mutual fund does a job, e.g., generate long-term wealth, generate monthly income, or invest in an asset class. Exit Load makes sure the investors do not jump out halfway, as the fund aims to achieve these goals.
Key Points to Remember
- Exit load is different for different mutual funds and even schemes at different points in time.
- Always refer to the most recent fund document/factsheet prior to redemption.
- If you are a long-term investor, quite frequently the exit load is zero!
- For SIPs, every monthly investment has its own holding period.
Conclusion
Exit Load in mutual funds is a minor yet important fee that you must know. It is designed to assist in motivating disciplined investing to keep the fund generally healthy. When you understand how Exit Load works and is calculated, you will be able to make your investment strategies more efficient in order to gain higher returns.
Remember, remaining in one place in the long term not only benefits you by preserving the exit loads but also helps your money to rise gradually.
