What Is an Exit Load in Mutual Funds?

What Is an Exit Load in Mutual Funds?

An exit load is a fee which is charged by a mutual fund when units are redeemed under the conditions specified in the scheme's offer documents.

Fund houses can use exit loads to discourage short term withdrawals in particular where the scheme is one that is intended for the investor with a longer investment horizon. The charge is typically a percentage of the applicable redemption value.

For instance a scheme might impose a 1% exit load if units are redeemed within the first year of purchase. An exit load would apply if the units were redeemed prior to the end of that first year. The exit load would not apply if the units were redeemed after the period in question.

However not all schemes have an exit load. Some will have different charges depending on when the units are redeemed and some schemes may have specific exemptions.

The scheme's most recent documentation should always be reviewed prior to making a redemption decision.

How Does an Exit Load Work?

Let's understand that with a simple example.

Suppose an investor buys mutual fund units worth Rs 50,000. A few months later the investment is worth Rs 55,000. The investor then decides to redeem the entire holding.

Assume the scheme charges an exit load of 1% on the applicable redemption value for any withdrawals made during this period.

Particulars	Amount
Investment value at redemption	₹55,000
Assumed exit load	1%
Exit load amount	₹550
Amount after exit load	₹54,450

In this case the investor gets ₹54,450 after the exit load is deducted (before any tax implications or other adjustments).

The calculation is just that, an illustration. The actual charge will of course be determined by the terms of the scheme, the applicable redemption value and the units being redeemed.

It's also important to make the distinction between the original investment and the redemption value. Exit load is generally calculated on the value of the units being redeemed rather than simply on the amount of the original investment.

When Is an Exit Load Charged?

The timing of the redemption is normally the key issue.

A scheme may have an exit load if you redeem your units within a certain period (e.g. a few days, a few months or one year) from the date of investment. Other schemes may have a different structure or no exit load at all.

For example if a scheme charges 1% on redemptions made within 365 days an investor who redeems their eligible units prior to the end of that period may be liable to pay the charge. The exit load will no longer apply once the relevant period has expired.

Investors should look at the precise wording in the scheme information document as the terms can be different from fund to fund.

Do SIP investments have an exit load?

Yes an exit load can apply to units bought via a SIP.

Each SIP installment is a separate investment made on a different date and as such may have its own holding period for exit load purposes.

For instance an investor who has been investing monthly for a year will have some units which will have crossed the relevant holding period and some which will not. Redemptions of the entire SIP investment could therefore be subject to different exit loads depending on the units.

This is why investors should not assume that simply completing one year of SIP contributions means that every unit can be redeemed at no cost.

Is Exit Load the Same as an Expense Ratio?

No. Both have an impact on mutual fund investing but they are different beasts.

The expense ratio is the annual operating expenses of the scheme expressed as a percentage of the scheme's net asset value (NAV).

An exit load is a conditional charge which may be applicable if units are redeemed within a given period.

The expense ratio is relevant in the context of holding the scheme, the exit load is relevant in the context of redemption. A scheme can have an expense ratio and no exit load, or it can have both.

Investors should look at both of them when assessing the costs of a mutual fund.

Do All Mutual Funds Have an Exit Load?

No. Exit load rules are different for each scheme.

Some funds will charge an exit load on redemption (if you redeem early), others won't. Some will charge different rates depending on the holding period, the amount redeemed or the type of units. Some will allow a limited amount of units to be redeemed without an exit load (again subject to the scheme's terms).

For instance one equity mutual fund may have an exit load on redemptions within a certain period and another scheme may have quite different conditions.

Investors should not assume that all equity funds, all debt funds or all index funds will have the same exit load. The relevant scheme documents will contain the applicable details.

Also an exit load is different from a lock-in period. An exit load is a charge which may apply to an eligible redemption. A lock-in period is a period during which redemption is not permitted until a certain period of time has elapsed or a certain condition is met.

How Can Investors Avoid Paying an Exit Load?

An exit load isn't always avoidable (especially if you need to get your money out early). A bit of planning however will go some way to helping the investor to determine whether or not a charge is likely to be applicable.

Check the scheme documents prior to investing. Look at the exit load rate, the applicable period and any exemptions referenced in the scheme information document.

Know the dates of your investments. Particularly important in the case of SIPs where your individual instalments will have had different holding periods.

Plan your withdrawals in advance. If the investment is just about to complete its exit load period and there's no real need to redeem at that point, it may be worth considering whether you should just wait.

Don't delay a necessary withdrawal just to avoid a charge. The investment decision should be about your financial needs and the risks of staying invested. A small exit load may be of considerably less importance than a change in your circumstances or a need to get your money out.

Look at the other costs and tax implications. The exit load is just one element of the total cost of redeeming your mutual fund units. You also need to consider the tax implications and the impact of market movement.

Where Can You Check a Mutual Fund’s Exit Load?

Investors can find the exit load details in the Scheme Information Document (SID), the Key Information Memorandum (KIM) and other official scheme disclosures issued by the AMC.

The fund house's website will also contain the relevant info on the individual scheme pages. Investors should be looking at the most recent documents available rather than relying on old articles or generalities about a fund type.

Prior to the redemption of units it's worth checking the purchase dates, the relevant holding periods, the units being redeemed and the estimated charges.

Platforms like the Ashika Dhanush app can be used to provide investors with information on investments and to help them explore the range of financial products available. The exit load on a particular mutual fund scheme should of course be checked against the scheme's own documentation.

Final Thoughts

An exit load may appear to be a minor consideration when you're selecting a mutual fund, but it can have an impact on the amount you actually get when you redeem your units. The exit load will be governed by the scheme's own rules and will vary depending on when the redemption takes place. There is no one exit load that applies to all mutual funds.

Before you invest, take a look at the scheme's exit load as well as its investment objective, risk profile, expense ratio and suitability in relation to your own financial objectives. That way you'll be in a position to make a more informed decision when it comes to the time you do wish to exit.