• HDFC securities
• 03 Apr 2023
• Knowledge Centre

 

 

Mutual funds are a popular investment option for investors seeking to diversify their portfolios and achieve their financial goals. While mutual funds offer several benefits to investors, they also come with certain costs. Exit load is one such important cost associated with mutual funds that investors should be aware of. It is the fee or penalty the fund house charges investors when they exit their fund investment. Let us understand in detail what is exit load in mutual fund.

What is exit load in Mutual Fund?

Exit load is the fee charged by the mutual fund house when investors choose to sell or redeem their mutual fund units before a certain period of time, known as the “exit load period.” The exit load is usually a percentage of the redemption value or the Net Asset Value (NAV) of the mutual fund, and its purpose is to discourage investors from withdrawing their investment before the completion of the agreed-upon investment period.

The exit load depends upon the asset management company (AMC), while some may charge it, others may not. Therefore, it becomes imperative for investors to consider the exit load factor when choosing a fund house for investment. Furthermore, the applicability of the exit load also depends on the type of mutual fund you have invested in.

What is the exit load for various types of Mutual Funds?

Exit load for various types of mutual funds can vary depending on the fund’s investment objective, investment strategy, and exit load period.

Equity funds typically have a high exit load to discourage investors from pulling out investments early. Most debt funds generally have a lower exit load as compared to equity funds. Exit load is nil or negligible in short-term debt funds like liquid and ultra-short duration funds.

Meanwhile, hybrid funds generally have a moderate exit load as compared to equity and debt funds.

How is exit load calculated?

A fund house primarily considers the exit load period and the fund’s Net Asset Value (NAV) to calculate exit load. Exit load calculation is also based on investment mode i.e., either lumpsum investment or Systematic Investment Plan (SIP).

Lumpsum investment

Suppose you made a lumpsum investment of Rs 1,00,000 last year in March. Within six months, you wished to redeem 100 units from your investment. Your fund’s NAV is Rs 200. Let’s say the fund charges an exit load of 1% of your fund NAV. Here’s how the calculation will work.

• Exit load = 1% of (100 x 200) = Rs 200
• Total redemption value = 100 x 200 = Rs 20,000
• Returns receivable post exit load deduction = 20,000 – 200 = Rs 19,800

SIP investment

The exit load calculation for a mutual fund Systematic Investment Plan (SIP) is a little complex. Here, the exit load will be charged only on the units that have not crossed the exit period.

Suppose your SIP investment holds a total of 1000 units and you wish to redeem your investment. Of the 1000 units, 300 units have crossed the exit period and hence, they will attract no exit load. The reaming 700 units will attract an exit load at the time of redemption.

Note, you are liable to pay the exit load even if you redeem at loss. Switching to another fund house also draws an exit load. A Systematic Withdrawal Plan (SWP) commenced before the maturity of the exit load period also draws an exit load.

Investors should carefully consider the exit load charges and the investment tenure before investing in a mutual fund. By doing so, they can make informed investment decisions and avoid any unnecessary charges.