An exit load in a mutual fund is a fee that AMC charges when an investor decides to withdraw or redeem mutual fund units before a specified period. This fee is charged to prevent premature exits and frequent trading and is used to cover the fund’s administrative and transaction costs.
Contents:
- Exit Load Meaning
- What Is Exit Load For SIP?
- How To Avoid Exit Load In Mutual Funds?
- What is the Zero Exit Load in a Mutual Fund?
- How Exit Load Is Calculated?
- What Is Entry Load Vs Exit Load Funds?
- Quick Summary
- FAQs
Exit Load Meaning
Exit load is a cost that mutual fund companies levy on investors for exiting the investment before a specific period. It is expressed as a percentage of the net asset value (NAV). For instance, if a fund has an exit load of 1% and the NAV is ₹100, an investor will receive ₹99 per unit while exiting the fund. The mutual fund house will deduct ₹1 per unit as exit load.
In the context of mutual funds in India, an exit load is charged to compensate for the transaction costs incurred by the fund house. It encourages investors to stay invested longer, helping maintain the fund’s stability and long-term growth prospects.
For example, suppose Mr. A invested ₹1,00,000 in a mutual fund that charges an exit load of 1% if the money is withdrawn within one year. If Mr. A decides to redeem his investment after six months, he would be charged an exit load of ₹1,000 (1% of ₹1,00,000), and he would receive ₹99,000.
What Is Exit Load For SIP?
Exit load for a Systematic Investment Plan (SIP) functions the same way as it does for lump-sum investments in mutual funds. The primary reason for imposing an exit load is to discourage investors from prematurely withdrawing their funds, allowing the mutual fund to maintain its liquidity and stability.
It is important to keep in mind that each SIP payment is a separate investment when it comes to SIPs. This means that the exit load is added to each payment separately based on when it was invested.
For instance, if the exit load is applicable for withdrawals within a year, and you decide to stop your SIP and withdraw all your money after 18 months, you’ll still have to pay an exit load for the installments that haven’t been completed one year.
Take the case of Ms. B, who started a monthly SIP of 5,000 in a mutual fund with a 1% exit load for withdrawals made within 12 months. If she decides to stop her SIP after 11 months and take out the total of 60,000, the exit load will be applied to the payments that have not been made in 12 months. If the last six payments have not been made for a year, she will have to pay a 300 exit load (1% of 30,000).
How To Avoid Exit Load In Mutual Funds?
Avoiding exit loads in mutual funds is largely a matter of timing and understanding the fund’s exit load policy. Each mutual fund scheme has a specified period, known as the exit load period, during which an exit load is levied on redemptions. If an investor redeems their units after this period, no exit load is charged. Therefore, one can avoid paying exit load by holding onto the fund units until the exit load period is over.
For example, if a mutual fund charges a 1% exit load if the units are redeemed within one year from the date of investment, an investor can avoid paying the exit load by retaining the units for more than one year.
In addition, some mutual fund schemes offer a ‘zero exit load’ if the withdrawn amount is below a certain limit. This limit is usually a small percentage of the total investment and varies from scheme to scheme. Investors can also use this feature to minimize their exit load by withdrawing small amounts regularly, provided it aligns with their financial goals.
What is the Zero Exit Load in a Mutual Fund?
Zero exit load in a mutual fund refers to a situation where the investor is not charged any fee when they choose to withdraw or redeem their units from the fund. This often happens when the investor stays invested beyond a specified period set by the fund, typically ranging from a few months to a few years.
The objective of a zero exit load policy is to incentivize long-term investments and discourage frequent trading. For example, a mutual fund might not charge any exit load if the investor remains invested for over a year.
How Exit Load Is Calculated?
Exit load in mutual funds is calculated as a percentage of the Net Asset Value (NAV) at the time of redemption. It’s important to remember that the exit load is charged only on the redeemable value and not on the entire investment.
For instance, let’s assume that Mr. C invests ₹1 lakh in a mutual fund that charges an exit load of 1% if withdrawn within one year. After 6 months, the value of Mr. C’s investment grows to ₹1.10 lakh. If he decides to redeem his entire investment at this point, the exit load will be calculated as 1% of ₹1.10 lakh, i.e., ₹1,100. So, Mr. C will receive ₹1.10 lakh – ₹1,100 = ₹1,08,900 upon redemption.
What Is Entry Load Vs Exit Load Funds?
Entry load is a fee charged when you invest in a mutual fund, reducing the initial investment amount. In contrast, the exit load is a fee deducted from the Net Asset Value (NAV) when you withdraw your investment, reducing the total amount you receive.
Entry load is a fee charged when investing in a mutual fund. It’s deducted from the initial investment amount, and the remaining amount is invested in the mutual fund. For instance, if a mutual fund has an entry load of 1%, and an investor invests ₹1 lakh in the fund, only ₹99,000 (after deducting 1% as entry load) would be invested.
On the other hand, exit load is a fee charged when redeeming the units from the mutual fund. This fee is deducted from the NAV at the time of redemption. For example, let’s consider a mutual fund that charges an exit load of 1% if an investor wants to redeem units, which would mean that his proceeds would be ₹1.20 lakh – 1% of ₹1.20 lakh, i.e., ₹1.18 lakh after the deduction of the exit load.
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What Is Exit Load In Mutual Fund – Quick Summary
- An exit load in a mutual fund is a fee charged by the fund house when investors redeem their units before a specific period.
- Exit load is designed to discourage premature withdrawals and incentivize long-term investment.
- For SIPs, the exit load applies to each installment individually based on the time of redemption.
- Exit load can be avoided by holding the investment for a predetermined period.
- Zero exit load mutual funds do not charge any fee upon redemption.
- The calculation of exit load is based on the NAV at the time of redemption and is typically a percentage of the redeemable amount.
- Entry load is charged at the time of investment, while exit load is levied at the time of redemption.
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Exit Load Meaning – FAQs
1.What Is an Exit Load In Mutual Funds?
Exit load is a fee charged by the fund house when an investor exits or redeems their investment before a specified period, typically within one year.
2.What is a good exit load in a mutual fund?
Exit loads for mutual funds are typically between 0% and 1%. Lower or no exit load indicates investor-friendly policies, allowing flexibility in redeeming investments.
3.What is the exit load of a mutual fund before 1 year?
The exit load of a mutual fund within the first year can vary from fund to fund. It is typically between 0% and 1%, although certain funds may have higher exit loads based on their investment strategies.
4.Which mutual fund has the lowest exit load?
Over time, the mutual fund with the lowest exit load may change. Here are some of mutual funds with the lowest exit load:
- DSP Small Cap Fund
- ICICI Prudential Bluechip Fund
- Aditya Birla Sun Life Frontline Equity Fund
- Axis Bluechip Fund
- Kotak Standard Multicap Fund
5.What is the maximum exit load?
The maximum exit load on mutual funds can vary between fund companies. It typically ranges from 1% to 2% of the redemption amount, although some funds’ investment strategies may result in higher exit loads.
