Definition:
Mutual Funds are those funds that have a pool of investments drawn from various investors having the same investment objectives. However, if a person or fund manager wants to manage these funds alone for the investors, then it is quite difficult for him or her to do so; here the AMCs (Asset Management Companies) comes into the scene.
These AMCs manage the investors’ funded fund and ensures the investments move in the growth direction. Whenever an investor exits or redeems the unit of a fund, then a small number of fees are charged to them by the AMCs. The above fee is called the Exit load.
In short, an exit load is a fee charged by the AMCs (Asset Management Companies) to the investor at the time of retrieving or exiting the units of the mutual fund.
Why is it Levied?
The major reason for levying exit load is to demoralize investors from backing out and pulling out their investments before the lock-in period expires. In addition, the exit load fee may also minimize the withdrawal numbers from the mutual fund schemes. However, not every fund levies an exit charge on its investors. Therefore, you need to keep in mind the ‘exit load aspect’ at the time of choosing a plan to invest in.
What is Exit Load in Mutual Funds?
Exit load charges in mutual funds are generally a percentage of the NAV (Net Asset Value) of the mutual fund an investor owns. The Net Asset Value (NAV) is the net value of a unit or entity and is calculated as the unit’s assets minus the value of its liabilities.
Generally, the AMCs take off the exit load from the total NAV, and the remaining amount gets credited to the account of the investor.
For example, if the load exit charge levied on an annual one-year system is 3% and is reimbursed within 4 months, well before the agreed investment period. As a result, an exit load enters the scene. If the NAV of the fund is Rs.60 at the time of redemption, the exit fee charged would be 3% of Rs. 60 which, is equal to 1.8. After subtracting this amount from the NAV, which is Rs. 58.2 gets credited to the investor’s account. Furthermore, if the investor fulfills the agreed possession of the funds, then he/she won’t have to pay the exit load during the time of redemption.
Calculation of Exit Load in Mutual Funds?
The rates of exit load depend on the different types of mutual funds; different mutual funds impose different exit loads.
Assume that an investor invested Rs. 30,000 in a Mutual Fund scheme in January of 2018. The plan has an exit load of 1.2% if redeemed or withdrawn before 1 year. The NAV is Rs. 120 which means that the investor has 250 units. Now, if the investor wants to withdraw the units after 4 months, i.e., in May 2018. In this case, the investor will be charged an exit load according to the calculation:
|
Amount invested in January 2018 |
30,000 |
|
NAV at the time of investment |
120 |
|
Units Bought |
30000/120=250 |
|
NAV at the time of redemption |
105 |
|
Exit Load |
1.2% of (105*250) = 315 |
|
Final Redemption Amount |
26250-315 = 25935 |
Exit Loads on various mutual funds:
Different mutual funds charge a rate of exit load which is different from each other. Although, not all mutual funds charge exit load on their investors. It is preferable to examine the exit load of the mutual fund schemes you are desired to invest in. Let’s explore out some rates on mutual funds.
Mutual funds for each of your goals:
- Instant investment.
- Zero commission.
- Completely paperless.
- There is no entry or exit load levy on Liquid Funds. This means that the investors can withdraw or redeem the investments whenever they wish and the money will be credited to their bank accounts by the very next day.
- Debt Funds can have an exit load sometimes. However, one can avoid the expense by adjusting the investment occupancy with the time period for which the fund charges an exit load.
Exit Load on SIP:
A maximum number of investors are typically puzzled to understand the concept of ‘Exit Load’ while investing through a SIP. An ordinary conception of the investors is if they have commenced or started a SIP a year ago, then they won’t be charged with any exit load if they sell the investment between the particular time.
The truth is, most of the investors are getting it incorrectly. In fact, the Exit load on SIP is considered to be almost similar to all the other mutual funds. A time span of 1 year is important to complete for each installment of a SIP to escape the exit load for the same.
For example, if you have invested in a SIP for two years, you need to wait for one more year, i.e., three years in total to get rid of the exit load.
Conclusion:
Exit Fee is an essential factor for an investor to be well informed of while investing. You should be ultra-careful before proceeding with a Mutual Fund scheme as it assists you to evaluate the returns once all the other expenses are solved. No investor would ever wish to receive a fine in the form of an exit load unknowingly. Exit Load can take a toll on you and your pre-planned investments; it can be ignored if you plan your sale of units judiciously.
Read Next: “Duration of investment”
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