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Mutual funds are investment pools that bring together a group of investors with similar financial objectives. However, investors need help managing these assets; this is where Asset Management Companies (AMC) step in.
These AMCs levy a tiny fee whenever an investor sells or redeems their fund units. This is what we call an “exit load.” What exactly is an exit load, and what is its significance? Let’s understand the concept in detail.
What is the exit load in a mutual fund?
There is a fee called the exit load that investors must pay to the mutual fund company if they sell or redeem their units before a particular date. Mutual funds mitigate the risk that short-term traders may pose to their long-term investors by charging a penalty for redeeming their shares early enough.
Remember that mutual funds don’t always charge exit loads and that the exact structure of these fees might differ from one fund to another. If there is an exit load, the fund’s offer document or scheme information document (SID) will specify for how long it will be levied.
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Why is the exit load levied?
The main goal of exit loads is to discourage individuals from selling their units before the lock-in period expires. Another reason to implement exit loads is to help reimburse the fund for any expenses connected with the early redemption of units and to prevent short-term trading.
Additionally, the exit load charge may discourage withdrawals from mutual fund schemes. One thing to remember is that funds don’t always apply exit fees. That is why, while deciding on an investment strategy, bear the “exit load aspect” in mind.
Zero exit load mutual funds
You may be subject to an exit load if you want to sell your units in a mutual fund within a particular period. Still, some mutual funds, like debt funds, don’t charge an exit fee.
Any time you decide to cash out your investment from a “zero exit load mutual fund,” you won’t have to pay a fee or penalty. This means that these funds are flexible, and buyers can join and leave the fund without any extra costs.
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Types of exit loads in mutual funds
Contingent Deferred Sales Charge (CDSC):
The redemption charges for mutual funds gradually decrease under the CDSC structure. Even though the fees are higher initially, they go down as the investor keeps the units for longer. Redeeming units held beyond the CDSC term is not subject to an exit fee.
Fixed exit load:
The fees for this kind of exit load remain unchanged in any way throughout the duration you’ve allocated for holding. For example, regardless of whether an investor redeems their units within thirty days or one year after purchase, a fixed exit load of 2% will be applied to the mutual fund.
Stepped exit load:
The stepped exit load is an example of a graduated structure, in which the proportion of the holding time devoted to the exit load varies in separate phases. With each holding period, the exit load rate goes down. By gradually lowering the penalty for early redemption, this structure aims to encourage long-term investment.
How is the exit load calculated?
You must be aware of the exit load % imposed by the scheme in which you have invested to determine the exit load in mutual funds. Offer documents and scheme information documents (SIDs) for mutual funds often include this information. Mutual fund schemes often impose exit fees on investors who sell their shares during the first year.
For example, if an investor put ₹50,000 in a mutual fund plan in February 2023. If you cash out of the plan before the first year is out, there’s a 2% exit load. The NAV is ₹80, meaning the investor has 625 units.
Suppose the investor wants to take out the units after six months, i.e., in August 2023,. According to the mutual fund exit load calculation, the investor will be required to pay an exit load in this example:
| Amount invested (₹) | 50,000 |
| NAV at the time of investment (₹) | 80 |
| Units | 625 |
| NAV at the time of redemption (₹) | 85 |
| Exit load (₹) | 2% of (53,125*0.02) = 1,062.5(53,125 is the total value during redemption calculated as, 625*85) |
| The final amount after paying the exit load (₹) | (53,125 – 1,062.5) = 52,062.5 |
Conclusion
Investors must be well-informed about exit fees. After deducting all expenses, it will clarify the amount of profit you will have. Keep in mind that different mutual fund plans may have different ways of setting up exit loads.
That being said, before investing in any mutual fund, make sure to read the documentation and be familiar with the exit load fees for more informed decisions.
FAQs
The exit load depends on the mutual fund scheme you are switching from and the scheme you are switching to. Some schemes may have zero exit load, while others may charge a certain percentage of the NAV.
Yes, you can exit a mutual fund at any time, unless it is a closed-ended scheme or has a lock-in period. However, you may have to pay an exit load if you exit before a specified period, which can reduce your returns.
There is no fixed answer to how long you should hold a mutual fund, as it depends on your investment goals, risk appetite, and fund performance. Generally, you should hold a mutual fund for at least three to five years to reduce the impact of market fluctuations.
The best time to sell mutual funds is when you have achieved your investment objective, or when the fund is not performing well, or when there is a change in your risk profile or financial situation. Do not sell mutual funds based on short-term market movements or emotions.
Selling mutual funds when the market is low is not a good idea, as it can result in losses and missed opportunities. Instead, you should stay invested and use the market dips as an opportunity to buy more units at a lower NAV.