Exit Load

Exit Load

This article delves into the concept of Exit load, how does it work and example

Investing in mutual funds has become a popular choice for individuals seeking to grow their wealth. However, like any financial instrument, mutual funds come with their own set of rules and costs. Among these is the exit load, which is a fee charged by the fund house when you redeem or sell your mutual fund units within a specified time frame.

What is Exit Load?

Exit load is a fee imposed by mutual fund companies on investors when they exit or redeem their units before a pre-defined period. It is expressed as a percentage of the redemption value and is designed to discourage short-term trading in mutual funds. The purpose is to ensure that investors remain committed for the intended investment horizon, allowing the fund manager to invest the pooled funds effectively

How Does Exit Load Work?

• When an investor decides to redeem their mutual fund units, the fund house calculates the applicable exit load based on the redemption amount and the time of redemption

Different mutual funds have varying exit load structures. For instance, equity funds may have an exit load for redemptions within 1 year, while debt funds might have shorter or no such restrictions.
Exit loads discourage frequent buying and selling of mutual fund units, encouraging investors to stay invested for the long term.
Exit loads help fund managers maintain a stable pool of assets, allowing them to plan investments effectively.
With fewer short-term redemptions, the fund maintains stability in its portfolio, benefiting all investors.
Some funds reduce the exit load percentage over time. For example, it might be 1% for redemption within 6 months and 0.5% for redemption within 1 year.
Some funds, such as liquid funds, typically do not charge an exit load due to their short-term nature.

Example of Exit Load Calculation

Scenario: An investor buys units of an equity mutual fund on January 1, 2024, worth ₹1,00,000. The fund has a 1% exit load if redeemed within 1 year.

1. If the investor redeems the units on June 30, 2024, the redemption value is ₹1,05,000 (assuming growth). The exit load is calculated as 1% of ₹1,05,000, i.e., ₹1,050.

• Net Pay-out: ₹1,05,000 - ₹1,050 = ₹1,03,950.



2. If the investor redeems on January 2, 2025 (after 1 year), there is no exit load, and the entire redemption amount is paid.