8 min read • Published 17 Feb 25
What is Exit Load in Mutual Funds & How to Calculate it?
Table of Contents
What is Exit Load in Mutual Funds?
An exit load is a fee charged by an AMC when the investor redeems or sells their mutual fund units before a certain holding period is completed.
The exit load in mutual fund is the fee charged when the investor redeems some units held for less than a specified holding period. This is generally calculated as a percentage of the amount redeemed and impacts returns.
For example, if an investor redeems units worth Rs 80,000 and the exit load for the mutual fund scheme is 1% if the investor redeems before a tenure of 1 year. Then, Rs. 800 will be deducted as the exit load, and the investor will receive Rs. 79,200 as the redemption proceeds.
Knowing how exit loads work and what it does can help an investor make better decisions and maximise investment.
What is the Purpose of Exit Load in Mutual Funds?
The exit load in mutual funds is designed for two main purposes:
- Prevent Frequent Buying and Selling: To prevent investors from frequently buying and selling their existing units of mutual funds. This reduces the fund manager’s ability to manage the fund, thereby impacting the overall fund performance.
- Promote Long-term Investing: To encourage long-term investing and thereby preserve the fund’s performance and subsequently the interests of long-term investors.
Types of Exit Load in Mutual Funds
Here are some of the prominent exit load fund types in mutual funds:
1. Fund-Specific Exit Load
A fund-specific exit load is a difference in the rates of exit load among mutual funds and their investment horizons. Equity funds carry a higher exit load, debt funds are short-term and hence have lower exit loads, and liquid funds are for very short-term investments and do not have an exit load or a minimal charge for redemptions within a few days.
2. Dynamic Exit Load
A dynamic exit load is a flexible fee structure in which the exit load rate is variable and dependent on market conditions or the fund’s performance. This type of exit load is rarely used and is usually applied in niche funds or specialised products.
3. Stepped Exit Load
A stepped exit load fee structure decreases the exit load in steps as the holding period increases. Thus, it encourages longer investment periods.
The longer an investor holds the mutual fund units, the lower the exit load he pays when he decides to redeem them.
4. Fixed Exit Load
A fixed exit load charges all redemptions made within a set timeframe, irrespective of how long the units have been held within that period. This simple fee structure discourages early withdrawals without encouraging varying periods within the timeframe.
5. Contingent Deferred Sales Charge
A CDSC is an exit fee that investors pay each time they redeem their units before a specific holding period lapses.
The fee depends on how long the units were held and usually declines over time. It is charged more when the redemption happens early in the investment period and decreases with each additional year as the tenure increases.
Important Points to Consider When Understanding Exit Load in Mutual Funds
Consider the following elements:
- Exit loads vary in mutual funds, so one must get the details.
- Since exit load will be reflected in returns, especially in the short term, one has to plan the investment period accordingly.
- Exit loads are waived or reduced for long-term investors, indicating how much value is placed on investing through the desired period.
- Exit loads balance fund stability and investor commitment so that such investments create a sense of alignment between investment choices and one’s timeline for money and financial goals.
- Exit load computation considers factors such as the holding period and the applicable exit load rate for that particular mutual fund.
Reasons for Exit Load Charge
This charge is applied for the following reasons:
- Avoiding Premature Exits: The exit load charge discourages investors from withdrawing any amount before the specified holding period, thus motivating them to hold the mutual fund units for the long term.
- Rebalance Costs: Early withdrawals may impose costs on a fund, like a trading commission or an amendment in portfolio administration. Exit loads would help the AMCs incur these costs.
- Safety of Long-Term Investors: It safeguards long-term investors as exit loads discourage short-term trading and protects the fund’s performance.
- Not all mutual funds charge an exit load: The pattern of the exit load differs with each fund. Therefore, evaluating details about the exit load is an important consideration for the mutual fund investment decision.
Calculation of Exit Load in Mutual Funds
The exit load is computed as a percentage of the net asset value of the redeemed units. The NAV is the net worth of a fund’s assets after deducting its liabilities, and the formula for its calculation is:
NAV = Total Assets−Total Liabilities/Total Shares
Generally, the exit load value is deducted from the NAV or the expected returns, and the balance is credited to the investor’s account.
Step-by-Step Example Calculation of Exit Load
Let’s consider a case in which a step-by-step calculation of exit load will be shown.
Suppose an investor invests in a mutual fund with an exit load of 1.5% if redeemed within six months. The NAV at the time of redemption is Rs. 50. Since the investor decides to redeem within four months, the fund will be payable with an exit load.
Here’s the calculation:
Total Value of Redeemed Units= 500 units × Rs. 50 = Rs. 25,000
Exit Load Percentage= 1.5%
Exit Load Amount= 1.5% × Total Redeemed Value = 1.5% × 25,000 = Rs.375
Redemption Amount = Total Redeemed Value − Exit Load Amount = 25,000 – 375 = Rs.24,625
Thus, after the deduction of the exit load, the investor would get Rs.24,625.
Overview Table: Exit Load Example
| Investment Tenure | Applicable Exit Load | NAV (per unit) at Redemption | Deducted Exit Load Amount | Amount Credited (Total) |
| < 6 months | 1.5% | Rs. 50 | Rs. 375 | Rs. 24,625 |
| >= 6 months | 0% | Rs. 50 | Rs. 0 | Rs. 25,000 |
In this scenario, the investor redeemed with an exit load deducted from the redemption amount. Had they waited for six months, they would have redeemed the amount without the charge of any exit load.
This example clarifies the significance of knowing the exit load period, which helps the investor plan accordingly and avoid unwanted exit loads.
Understanding Exit Loads on Different Types of Mutual Funds
Exit load charges differ significantly by mutual fund type. Some funds impose an exit load to prevent early redemption, while others- for example, liquid funds- don’t charge an exit load.
Here is the general overview of exit load structures across different mutual fund types:
1. Liquid Funds
Liquid funds are not subject to entry and exit loads. In other words, no entry and exit load is levied on their investments.
Investors can withdraw investments at any time without any extra charge; the money is credited to the investor’s bank account immediately by the next business day. Thus, high-liquidity mutual funds make popular short-term investment avenues.
2. Debt Funds
Debt funds may or may not have an exit load. For schemes that carry an exit load, the investor can conveniently avoid this fee by maintaining the investment term for the necessary period.
If the investment term corresponds to the exit load period, then the investor would not incur unnecessary charges and would still enjoy the stability that debt funds promise. However, an exit load shall be charged if the required period is not adhered to and units are sold before the end of the term.
3. Equity Funds
The exit load for equity funds generally differs, though it is usually around 1% if the units are sold within the first 12 months. However, the rate may vary for different funds and the AMC.
Investors should carefully read the terms of the exit load charged on each equity fund because such charges impact returns over a short-term period.
4. Exit Load on SIP (Systematic Investment Plans)
Exit load in SIPs is a slightly different concept, sometimes confusing investors.
Each SIP instalment is considered a separate investment; hence, the exit load is computed based on age. For example, if an investor redeems units from a SIP, the exit load would be levied on the instalments redeemed during the load period, which may differ depending on the scheme.
Due to this specific format, it is essential to analyse the exit load terms of SIPs to accurately compute the possible deductions that will enable the planning of redemption time.
Conclusion
Exit Load is not a charge but a tool that mutual fund companies use to encourage investors to prolong unit holding periods. It also offsets the costs associated with exit. Knowledge of an exit load could make all the difference for investors regarding their timelines for proper exits and accuracy in planning returns.
Considering exit load will, therefore, help optimise investment decisions and avoid unwarranted charges on earnings. Understanding the concept using the expertise of professionals will help investors experience a smooth mutual fund journey toward their financial goals.
Q: What is the exit load in mutual funds, and how is it different from the entry load?
Simply put, the entry load is applied when investors buy mutual fund units, whereas the exit load is the charge made when selling or redeeming them. Both charges are paid to the AMC and may differ for different fund types and investment periods.
Q: Do investors pay an exit load when they opt for SWP?
Yes, they may have to. However, based on the fund's relevant terms, this is mandatory only in cases where they withdraw money via SWP before the end of the exit load period.
Q: What is the optimal exit load for the mutual funds?
Generally, a low exit load is preferable from an investment standpoint as it helps reduce charges at redemption and improves net returns.
Q: Do exit loads apply when switching from one mutual fund scheme to another managed by the same Asset Management Company (AMC)?
When switching between mutual fund schemes within the same AMC, the exit load may or may not be applicable. One needs to see the terms of the fund one is switching from and the fund that one is switching to.
Q: How do you avoid exit load in mutual funds?
Exit Load can be avoided if you plan to sell your existing units of mutual funds judiciously in advance. You can hold the units of the mutual fund up till the minimum holding period and plan selling it after this. Additionally, to avoid exit load in mutual funds, investors can also consider Exchange Traded Funds (ETFs) that do not levy an exit load.
Q: What is zero exit load in mutual funds?
There maybe some mutual funds that offer Zero exit load, where there are no additional penalties or charges levied on buying and selling of your existing mutual fund units. The purpose of these zero exit load mutual funds is to provide investors with cost-effective and flexible options in mutual funds.
Q: What is the difference between exit load and expense ratio?
Exit Load in mutual funds is levied by an AMC when the investor withdraws their units before the lock-in period. Whereas, expense ratio is the management fee that is charged, that includes annual operating expenses like portfolio management fees, marketing expenses and allocation charges. This expense ratio is deducted from the NAV.
Q: Why is the exit load charged?
An Exit Load is a fee charged by the AMC on early withdrawals of mutual fund units, made by an investor. This fee is charged to discourage investors from early redemption of units, so as to motivate long-term investing, while also maintaining fund stability.
Q: What is a good exit load in mutual funds?
Exit Load in mutual fund varies across different funds and its types. The best exit load for a mutual fund is when its considerably low or non-existent. Typically, mutual funds charge an exit load of 1% for early withdrawals within the first year of investment. An exit load is generally considered good if its between 0-1%.
