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A mutual fund is a joint pool of investments brought from different investors. It requires a team of financial experts to maintain and produce returns. So, it is but obvious that the service comes at a fee. Exit Load is the fee that is levied on the investors.
What is an Exit Load?
An exit load refers to the fee that the Asset Management Companies (AMC) charge the investor at the time of exiting or obtaining a scheme. Sometimes it also refers to the commission to the fund house or pre-exit fine, if the investor exits the fund before the lock-in period is over. Not all funds levy an exit charge. Hence, while picking a plan, do consider the exit load with its expense ratio. Yes, the exit fee is not part of your expense ratio.
In the case of open-ended funds, the investors have the option to exit the investment plan as per their decision. Many a time, investors fail to accept the specified time for which they had agreed to invest in a fund. So, an exit load can frighten the investors from pulling out their investments from mutual fund schemes early. This fee may also decrease the number of removals from the mutual fund schemes.
What are Exit Load in Mutual Funds?
The exit fee is normally a percentage of the Net Asset Value (NAV) of the mutual fund held by investors. Once the AMC subtracts the exit load from the total Net Asset Value, the leftover amount gets credit to the investor’s account.
For instance, if the exit charge for a one-year project is 2% and you redeem within 6 months, this would be much before the allowed investment period. So, here it is like an early-exit fine. If the NAV of the fund is Rs. 35 through the time of redemption, then the exit fee would be 2% of Rs. 35, which amounts to Rs. 0.7. The leftover amount, Rs. 34.30 gets recognized to the investor. And if the investor realizes the agreed fund tenure, then he/she need not pay the exit load at the time of redemption.
- Exit loads differ from plan to plan but have to be within the limit directed by the market index, the Securities and Exchange Board of India (SEBI). There are many mutual fund plans which do not impose an exit load. After the predefined period, most equity funds have zero exit load.
- Exit load is suitable if you invest a lump sum or the Systematic Investment Plan (SIP). In SIP, each payment is taken as a new investment and, hence, you will be imposed an exit load for it if you sell units allowed in each installment within the predefined time.
- One has to meet exit load for mutual funds bought through Direct plans also. In Direct plans investments are not through a distributor and it serves for existing & new schemes. Direct plans were started from 1st Jan 2013 and have a lower expense ratio
Why is exit load levied?
While the clearest reason is to warn investors from early redemption while supporting to build a long-term corpus, an exit load helps the fund manager as well.
With the presumption that money will not be running out regularly in the form of frequent redemption pressures, a fund manager can better plan the investment of the corpus. If there’s an account of daily redemption requests, the fund manager will be required to keep a portion of the corpus as liquid cash to merit such redemption pressures or else will have to rejig the portfolio to generate cash.
Do all schemes levy exit load?
Not all, but most of the schemes do levy an exit load. Mostly the exit load is levied for selling the units in one year of buying but some funds have a larger period defined for the levy of such load. Debt funds, too, levy an exit load but the time could be as low as a day or a month since the overall security of the fund could be only a few weeks or months. Also, fund houses, if they so desire, can levy a higher exit load as well.
Why is it payable by the investor?
Free things are regularly taken for granted so is in the case of investments. Hence, mutual fund companies impose a charge from the investors for their exit from the mutual fund investment when they fail to accept the specified number of months that they agreed upon at the time of investment. To frighten investors from taking such a decision, an exit load is arranged. The individual purpose of such a fee applicable at the time of exit is to decrease the number of withdrawals from the plans of mutual funds. Exit load fee varies from one fund house to another.
How to calculate it in Mutual Funds?
The exit load is, usually, at the choice of the fund manager. Suppose, an investor has invested Rs. 10,000 in a mutual fund scheme in January 2017. The NAV of the scheme is Rs. 100 and the exit fee for obtaining before one year is 1%. In March 2017, the investor would opt to invest Rs. 6000 at NAV of Rs. 100 in the same fund. How will you calculate the exit fee, if he redeems the fund in December 2017, when the NAV is Rs. 110? How can you know the exit fee, if the redemption happens in January 2018, when the NAV is Rs. 115?
It is quite simple as given below.
| Quantity of Units bought in January 2017 | Rs. 10,000/100 = 100 (Total NAV/Number of Units bought) |
|---|---|
| Quantity of units bought in March 2017 | Rs. 6000/100 = 60 |
CONCLUSION
Mutual funds companies receive a sum from investors when they register or leave a scheme. The fee charged is commonly referred to as a ‘load’. Exit load is a fee or an amount charged from an investor for exiting or dropping a scheme or the company as an investor
Thus, being knowledgeable about exit fees is necessary for an investor. It helps you measure your returns after all costs. You can also invest with ClearTax Invest for hand-picked funds after doing all the analysis. Start investing.
To become a successful investor of mutual funds or a distributor log on to our website Wealthbucket. Our expert team will connect to you shortly to provide the best services. Our company deals in services like short term mutual funds, liquid mutual funds, debt mutual funds, equity mutual funds & income funds
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