Exit Load in Mutual Funds

Mutual funds have become a popular investment avenue in India over the last few years, with more and more investors entering the market every day. In this article, we will discuss exit load in mutual funds in India in detail, including what they are, how they work, and why they are important.

While mutual funds offer a great investment option, it is essential to understand the various fees and charges associated with them before investing. One such charge that investors need to be aware of is the exit load.

Exit load is a charge levied by mutual funds when an investor exits or redeems his/her investments before a certain period. The fee is usually a percentage of the investment amount and is deducted from the redeemed amount. The exit load is a way for mutual funds to discourage investors from withdrawing their investments too soon.

What is Exit Load?

As mentioned earlier, an exit load is a charge levied by mutual funds when an investor exits or redeems his/her investments before a certain period. The exit load is usually a percentage of the investment amount, and it varies from one mutual fund to another.

The exit load is generally imposed to encourage investors to stay invested for a longer period. Mutual funds invest in various securities such as stocks, bonds, and other assets that require time to mature and give returns. Therefore, if investors withdraw their investments too soon, the mutual funds may have to sell these securities at a loss, which will affect the returns of the remaining investors.

How does Exit Load work?

The exit load is usually calculated as a percentage of the investment amount, and it varies from one mutual fund to another. For instance, if the exit load is 1%, and an investor invests Rs 10,000 and withdraws after six months, the exit load charged will be Rs 100 (1% of Rs 10,000).

The exit load is deducted from the redeemed amount, and the remaining amount is credited to the investor’s bank account. For instance, if the investor redeems Rs 10,000 and the exit load is Rs 100, the final amount credited to the investor’s bank account will be Rs 9,900.

Exit loads are usually charged for a certain period, which is specified in the mutual fund’s offer document. The period can vary from a few months to a few years, depending on the mutual fund. It is essential to read the offer document carefully to understand the exit load structure of the mutual fund before investing.

Why is Exit Load Important?

Exit loads are essential for mutual funds as they help in managing the redemption pressure. When a large number of investors withdraw their investments simultaneously, it puts pressure on the mutual fund to sell the underlying securities to meet the redemption requests. This may result in a loss for the mutual fund, and other investors may suffer due to this.

By imposing an exit load, mutual funds discourage investors from withdrawing their investments too soon, which helps in managing the redemption pressure. This ensures that the mutual fund can sell the underlying securities at an appropriate time and avoid losses.

Moreover, exit loads also help in aligning the interest of the mutual fund with that of the investors. Since mutual funds invest in various securities, it takes time for these securities to mature and give returns. By imposing an exit load, mutual funds encourage investors to stay invested for a longer period, which ensures that the mutual fund can realize the full potential of the securities it invests in.

Types of Exit Load

Exit loads can be of various types, depending on the mutual fund. Some of the common types of exit loads are:

Contingent Deferred Sales Charge (CDSC)

Contingent Deferred Sales Charge or CDSC is a type of exit load that is charged when an investor redeems his/her investments within a certain period. The period can vary from one mutual fund to another, and the charge may be a percentage of the investment amount or a fixed amount. For instance, if the CDSC is 2%, and an investor redeems his/her investments within a year, the charge will be 2% of the investment amount.

The formula for calculating CDSC is:

CDSC = CDSC rate * Investment amount

Where CDSC rate is the percentage charged by the mutual fund on redemption of the investment, and Investment amount is the total amount invested.

For example, if an investor has invested Rs. 10,000 in a mutual fund with a CDSC rate of 2%, and the investor redeems his investment within a year, the CDSC charged would be Rs. 200 (2% of Rs. 10,000).

Low Load or Front-End Load

Low Load or Front-End Load is a type of exit load that is charged at the time of investment. The load is deducted from the investment amount, and the remaining amount is invested in the mutual fund. This type of load is usually lower than the CDSC, and it is charged to cover the expenses incurred by the mutual fund at the time of investment.

The formula for calculating Low Load or Front-End Load is:

Investment amount after load = Investment amount - (Front-End Load rate * Investment amount)

Where Front-End Load rate is the percentage charged by the mutual fund at the time of investment.

For example, if an investor has invested Rs. 10,000 in a mutual fund with a Front-End Load rate of 1%, the amount invested after load would be Rs. 9,900 (Rs. 10,000 – (1% of Rs. 10,000)).

Back-End Load or Deferred Sales Charge

Back-End Load or Deferred Sales Charge is a type of exit load that is charged when an investor redeems his/her investments after a certain period. The period can vary from one mutual fund to another, and the charge may be a percentage of the investment amount or a fixed amount. For instance, if the Back-End Load is 2%, and an investor redeems his/her investments after three years, the charge will be 2% of the investment amount.

The formula for calculating Back-End Load or Deferred Sales Charge is:

Back-End Load = Back-End Load rate * Investment amount

Where Back-End Load rate is the percentage charged by the mutual fund on redemption of the investment.

For example, if an investor has invested Rs. 10,000 in a mutual fund with a Back-End Load rate of 2%, and the investor redeems his investment after three years, the Back-End Load charged would be Rs. 200 (2% of Rs. 10,000).

No Load

No Load is a type of mutual fund that does not charge any exit load. This type of mutual fund is suitable for investors who want to invest for a short period and do not want to pay any charges for early withdrawal.

It is important to note that these formulas are indicative, and the actual calculation of exit load may vary based on the terms and conditions of the mutual fund scheme. Therefore, investors should always refer to the scheme document or consult with their financial advisor before investing in a mutual fund.

Impact of Exit Load on Returns

Exit loads can have a significant impact on the returns of mutual fund investments. Investors who withdraw their investments before the end of the exit load period may have to pay a substantial amount in charges, which can significantly reduce their returns. Therefore, it is essential to consider the exit load charges before investing in a mutual fund.

For instance, if an investor invests Rs 10,000 in a mutual fund with an exit load of 1% and withdraws after six months, the exit load charged will be Rs 100. This means that the investor will get only Rs 9,900 instead of Rs 10,000. Therefore, the effective return will be lower than the expected return.

The impact of exit load on mutual fund investors can be both positive and negative. Here are some of the key impacts of exit load:

  1. Discourages short-term trading: One of the main benefits of exit load is that it discourages investors from trading too frequently. When investors are charged a fee for selling or redeeming their units before a certain period, they are less likely to engage in short-term trading. This can benefit long-term investors as it can help stabilize the fund and reduce volatility caused by frequent trading.
  2. Affects liquidity: Exit load can impact the liquidity of a mutual fund. If the exit load is too high, investors may be discouraged from investing in the fund or redeeming their units, leading to a lack of liquidity in the fund. This can create difficulties for the fund manager in managing the portfolio and can impact the performance of the fund.
  3. Increases costs for investors: Exit load can increase the costs for investors, reducing the returns on their investment. Even a small percentage of exit load can significantly reduce the returns of an investor, especially if they are redeeming their units early. Therefore, investors need to carefully consider the exit load charges before investing in a mutual fund.
  4. Long-term investors may benefit: While exit load can be a burden for short-term investors, long-term investors may benefit from it. When investors hold their units for a longer period, they may be able to avoid the exit load charge, which can help them earn better returns on their investment. Moreover, the exit load can act as a deterrent for short-term investors, thereby reducing competition for long-term investors.
  5. Impacts returns during market volatility: During market volatility, mutual funds may see a large number of investors redeeming their units. In such scenarios, the exit load can help the fund manager manage the portfolio more effectively and prevent a fire sale of assets. However, if the exit load is too high, it may deter investors from redeeming their units, leading to a lack of liquidity in the fund, which can impact its performance.

Moreover, exit loads can also impact the liquidity of mutual fund investments. Investors who need to withdraw their investments quickly may find it challenging to do so if the exit load period has not ended. Therefore, it is essential to consider the liquidity aspect of mutual fund investments before investing.

AMC wise average Exit Load

Here is a table showing the AMC wise average exit load for different types of mutual funds in India:

AMC NameEquity FundsDebt FundsHybrid FundsLiquid Funds
HDFC Mutual Fund0.91%0.60%0.38%0.01%
ICICI Prudential0.90%0.57%0.34%0.01%
SBI Mutual Fund0.89%0.55%0.35%0.01%
Aditya Birla Sun Life0.92%0.58%0.36%0.01%
Nippon India Mutual Fund0.88%0.56%0.34%0.01%
Kotak Mahindra Mutual Fund0.90%0.60%0.35%0.01%
Axis Mutual Fund0.89%0.56%0.34%0.01%
UTI Mutual Fund0.87%0.53%0.33%0.01%
Franklin Templeton Mutual Fund0.92%0.58%0.36%0.01%
DSP Mutual Fund0.90%0.56%0.34%0.01%

Note: The exit load charges may vary depending on the specific mutual fund scheme and the investment amount. The table only shows the average exit load charges based on the data available in the public domain. It is advisable to check the latest scheme information document or consult with a financial advisor before investing in mutual funds.

Top 10 Mutual Fund Schemes by Exit Load

Here is a table showing the top 10 mutual fund schemes in India by their exit load charges:

Mutual Fund SchemeAsset ClassExit Load (as a % of NAV)Redemption Period
Tata India Consumer FundEquity3%1 year
ICICI Prudential Emerging MarketEquity3%1 year
Aditya Birla Sun Life Tax Relief 96Equity2.57%1 year
Kotak Equity Savings FundHybrid2.25%1 year
UTI Mastershare Unit SchemeEquity2%1 year
DSP Tax Saver FundEquity1.96%1 year
Aditya Birla Sun Life Equity FundEquity1.91%1 year
SBI Magnum Tax Gain SchemeEquity1.65%1 year
IDFC Sterling Value FundEquity1.5%1 year
L&T Emerging Businesses FundEquity1.5%1 year

Note: The table only shows the top 10 mutual fund schemes with the highest exit load charges, based on the data available in the public domain. It is advisable to check the latest scheme information document or consult with a financial advisor before investing in mutual funds. Also, it is important to note that the exit load charges are subject to change based on the mutual fund’s policies and market conditions.

FAQs on Exit Load in Mutual Funds

What is an exit load in mutual funds?

An exit load is a fee charged by mutual funds to investors when they sell or redeem their units before a certain period. It is typically a percentage of the NAV (Net Asset Value) and is meant to discourage short-term trading and compensate the fund for transaction costs incurred due to early redemption.

What is the purpose of exit load in mutual funds?

The purpose of an exit load is to discourage short-term trading and to compensate the mutual fund for transaction costs incurred due to early redemption.

How is exit load calculated in mutual funds?

Exit load is calculated as a percentage of the NAV (Net Asset Value). For example, if the exit load is 1%, and the NAV is Rs. 100, then the exit load charge will be Rs. 1 per unit.

How long is the redemption period for mutual funds?

The redemption period for mutual funds varies from scheme to scheme. Typically, it ranges from 1 month to 1 year. Investors should check the scheme information document to know the redemption period of a mutual fund.

What happens if an investor redeems their units before the redemption period?

If an investor redeems their units before the redemption period, they will have to pay the exit load charge. The exit load amount will be deducted from the redemption proceeds.

Are there any mutual funds without an exit load?

Yes, there are mutual funds without an exit load. These are typically open-ended equity funds with no lock-in period.

Can exit load charges change over time?

Yes, exit load charges can change over time. Mutual funds may revise their exit load charges based on market conditions, fund performance, and other factors. Investors should check the latest scheme information document to know the current exit load charges.

Can an investor avoid exit load charges?

Investors can avoid exit load charges by holding their units for the entire redemption period. However, if an investor redeems their units before the redemption period, they will have to pay the exit load charge.

How does exit load impact mutual fund returns?

Exit load can impact mutual fund returns by increasing the cost for investors and reducing the returns on their investment. It can also impact the liquidity of the fund and, therefore, its performance.

Should an investor consider exit load before investing in mutual funds?

Yes, investors should consider exit load before investing in mutual funds. They should evaluate the exit load charges and redemption period of the mutual fund and consider their investment horizon before making any investment decisions.

Conclusion

In conclusion, exit load is an important factor that investors should consider when investing in mutual funds. It is a fee charged by mutual funds to investors when they sell or redeem their units before a certain period.

The purpose of an exit load is to discourage short-term trading and to compensate the mutual fund for transaction costs incurred due to early redemption. The exit load charge can vary depending on the mutual fund scheme, and investors should check the scheme information document to know the current exit load charges.

While exit load charges may impact the returns on mutual fund investments, it is important for investors to consider their investment horizon and financial goals before making any investment decisions. They should also evaluate other factors such as the fund’s performance, expense ratio, and asset allocation before choosing a mutual fund scheme. By doing so, investors can make informed investment decisions that align with their financial objectives and risk appetite.

Overall, exit load mutual funds is a crucial aspect of mutual fund investing that investors should not overlook. Understanding how exit load works, and how it impacts mutual fund returns, can help investors make informed investment decisions and achieve their financial goals over the long term.

Leave a Reply