What is an Exit Load in Mutual Funds?

Exit load in a mutual fund refers to a fee that is charged by the fund house. This fee is charged when an investor redeems their funds before completing a specified holding period. This is calculated as a percentage of the redemption value and is deducted from the payout amount. The exit load in mutual fund was introduced to reduce short term withdrawals and to protect long-term investors from the impact of regular redemptions. This process may increase the transaction costs and disturb portfolio stability. The exit load structure can be different across schemes, with some funds charging it only if units are redeemed within a certain time frame, such as 6 or 12 months. Understanding the exit load meaning, can help investors plan holding period properly and make informed investment decisions.  

How to Calculate Exit Load in Mutual Funds? 

The exit load in a mutual fund is calculated as a percentage of the redemption amount based on the applicable NAV and the holding period from the date of purchase. Two factors determine the exit load: 

• The exit load percentage mentioned in the scheme. 
• The period for which the units are held. 

The formula of exit load is,  

Exit Load = Number of Units Redeemed × NAV × Exit Load (%) 
Final Redemption Amount = (Units × NAV) − Exit Load 

Example 1: Lump Sum Investment 

Let’s say there is a scheme that charges a 1% exit load for redemptions within 365 days. 

• The units redeemed are 500 
• NAV: ₹100 
• Exit load: 1% 

From this example, we get to know that ₹500 is deducted as exit load, and the investor receives ₹49,500. 

Example 2: SIP Investment 

In a systematic investment plan (SIP), the units are purchased at different NAVs every month. Here the exit load will be calculated separately for each instalment based on its holding period. 

Suppose an investor invests ₹10,000 monthly starting 1 July 2020, and the scheme charges 1% exit load if redeemed within 365 days. 

Here, the units held for more than 365 days may not attract exit load, while those held for less than 365 days will attract 1% exit load. Therefore, in SIP, exit load applies only to the specific units that fall within the exit load period. 

After understanding how is exit load calculated, the article further explains the types of exit load in mutual fund.  

Types of Exit Load in Mutual Funds 

Here are the types of exit load in mutual funds: 

• Contingent Deferred Sales Charge (CDSC): When investors redeem their 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. 

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.  

Conclusion 

Exit load in mutual funds is an important factor that investors must understand before redeeming their investments, as it directly affects the final amount received. Knowing the applicable exit load period and percentage helps in better planning of holding duration and avoids unnecessary deductions. Along with exit load, investors should also be aware of other charges and scheme-related conditions while investing in mutual funds. By considering all these aspects, investors can make informed investment decisions through the BlinkX Online trading app to invest in a disciplined and efficient manner.