Exit Load in Mutual Funds

Mutual funds are one of the popular investment options for investors to generate additional income. A mutual fund is a pool of investments invested by different investors with the same objectives. While investing in mutual funds, you must also understand the charges levied on mutual funds. Exit load in mutual funds is one such charge. Let us understand the exit load in mutual, ‘what is exit load in mutual funds?’, the types of exit load in mutual, ‘how to calculate exit load in mutual fund?’, and other related aspects in detail.

What is an Exit Load in Mutual Funds? 

For an investor managing mutual funds alone is not an easy task. Generally, Asset Management Companies (AUC) manage mutual funds for investors ensuring the growth of their funds. In return for managing their funds, these AMCs charge a small amount if the investor exits or redeems the units. The charge or fee is called the exit load.

Types of Exit Load in Mutual Funds

Here are the types of exit load in mutual funds:

·       Contingent Deferred Sales Charge (CDSC): When you redeem your units within a specified period is termed as CDSC, a back-end load. A longer investment hold lowers the CDSC.

·       Contingent Deferred Sales Load (CDSL): It is incurred when the units are redeemed based on the initial investment instead of the current value. The load decreases over time similar to CDSC.

How to Calculate Exit Load in Mutual Funds?

Exit load in mutual funds is calculated differently for lumpsum investment and SIP investment. Depending on your investment type you can check the calculation Below is the given calculation for the exit load in lumpsum investment and exit load in SIP investment:

Exit load in Mutual Fund for Lumpsum investment

To calculate the exit load in mutual fund for lumpsum investment, we will take the example of an investor Mr. Z who invested ₹ 1,00,000 in an equity mutual fund scheme (exit load of 1% before 12 months) in Jan’25. Suppose Mr. Z would have redeemed after 12 months no exit load would have been charged. The exit load is charged on the current value of the investment and not on the original invested value.

Now suppose he wishes to stop the investment and redeem it in June’25 at a NAV of ₹100, the exit load calculation is as below-

Exit load in Mutual Fund for SIP investment

To calculate the exit load in mutual fund for SIP investment, we will take the example of an investor Mr. X who started a monthly SIP investment of ₹ 10,000 in an equity mutual fund scheme (exit load of 1% before 12 months) in Jan’25. Now suppose he wishes to stop the SIP and redeem it in June’19, the exit load calculation is as below-

Exit Loads on Various Types of Mutual Funds 

Depending on the type of mutual funds, exit load charges may vary. Here is an overview of the exit loads on various types of mutual funds:

·       Equity Funds: Equity funds are considered a higher risk-reward profile with a longer investment period. These funds have a higher short term exit load. This discourages investors from early exits. There are many equity funds, that don’t charge any exit load.

·       Debt Funds: Bonds and government securities fall under debt funds which offer fixed-income securities. These funds have lower exit loads as compared to equity funds.

·       Hybrid Funds: If you redeem the investment early, hybrid funds including arbitrage funds have an exit load. Most arbitrage funds have an exit load if redeemed within 15 to 30 days. 

Exit Loads Charge on Different Types of Mutual Funds

Note: The above-mentioned is tentative and might vary.

Why is exit load levied on mutual funds?

Below are the reasons why exit load is levied on mutual funds:

·       Discouraging Investors to redeem early: With the implication of exit load, it discourages investors from frequent buying and selling of mutual funds units. Redeeming mutual funds early impacts the fund’s management and performance and financial interest for other investors.

·       Protecting long-term investors: When investors redeem their mutual funds units prematurely, it impacts the total value of the securities held under the scheme decreases. This might decrease the returns. To protect the interest of long-term investors, AUM (Asset Under Management) imposes exit loads.  This allows investors to stay invested for a long period. 

End Note

Exit load in mutual fund is a vital part that you must understand while investing in mutual funds. This helps you in planning your investment better. You must know various charges while investing in mutual funds along with exit load. Considering all the aspects, you can invest in mutual funds with BlinkX. To invest, you can use our official app – BlinkX, and invest smartly.