What is Exit Load in Mutual Funds?
Simplicity is the key to financial well-being. Whether it is investment products or financial decisions, life can be easy and uncomplicated if things are kept simple and easy to understand. This article is an attempt to make your financial decisions easy with respect to mutual funds. Mutual fund is a collective pool of money of multiple investors, invested in different financial products. Mutual fund companies collect a fee from investors for joining or exiting a fund. The fee charged is known as load. Exit load is the fee levied by the company at the time of an investor leaving a scheme or investment fund. Open ended funds allow the investor the option to exit the investment as per his choice.
Why is this exit load payable by the investor?
Free things are always taken for granted so is in the case of investments. Hence, mutual fund companies charge a commission from the investors for their exit from the mutual fund investment when they fail to honour the specified number of months that they agreed up on at the time of investment. To discourage investors from taking such a decision, an exit load is determined. The sole purpose of such a fee applicable at the time of exit is to reduce the number of withdrawals from the schemes of mutual funds. Exit load fee differs from one fund house to another.
The exit load is a percentage applied on the NAV (net asset value), and the reduction in the amount is credited back to the investor. For example, a mutual fund defines its exit load to be 1% on redemption within a year. If an investor invested his money in the beginning of the year on 10th January and he decides to redeem it on April 10th, when the fund’s NAV is at around Rs 25. Since April 10 is much before the agreed period of the redemption, the investor will attract an exit load on failing to honor his commitment. The amount returned to the investor post the exit load will be 24.75. The exit load amounts to Rs 0.25 (1% of Rs 25), which is deducted and credited back into the investor’s account. On completion of the agreed term, say the investor would want to redeem the load on 10th January the next year, then he is not entitled to pay any exit load on the same. It is to be noted that switching out of a fund from one to another is also qualified as a redemption. However, units that are under dividend reinvestment do not suffer exit loads.
Calculation of Exit Load in SIPs
Every installment of the Systematic Investment Plan is calculated for exit load. If the lock-in period for the SIP installment is agreed upon as 12 months than the load will be applied within the same time frame. The same rule of exit load is applicable when an investor makes multiple investments of varied sums at different points in the fund.
Every fund defines its own exit load and therefore investors are expected to read the terms and conditions carefully before investing in the mutual fund. Ideally, in most cases exit load is usually in the range of 0.25 to up to 3%. The rate and the lock-in time period differs too. For example, rate for redemption for 120 days can be different from rate applicable for redemption post six months.
For short-term funds the exit loads are for a short duration of 60 or 120 days, Exit load might not be charged for ultra-short term funds. Long term debt funds however follow the standard rule and have an exit load for around one year.
Merger of Schemes
In case of a merger of two funds for whatsoever reason, exit load will not be applicable in such a case. In such instances, investors are provided with the option of opting out from the fund and retrieve their amount in a specific time window. Failure to opt out within time window attracts an exit load.
We hope to have cleared most of your doubts on exit loads in the most simplified way possible. For more on the financial world, keep on reading.
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