{"id":12548,"date":"2021-10-26T07:11:19","date_gmt":"2021-10-26T07:11:19","guid":{"rendered":"https:\/\/www.5paisa.com\/finschool\/?post_type=markets&#038;p=12548"},"modified":"2024-08-02T16:39:31","modified_gmt":"2024-08-02T11:09:31","slug":"things-to-know-before-buying-mutual-funds","status":"publish","type":"markets","link":"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/things-to-know-before-buying-mutual-funds\/","title":{"rendered":"Mutual Fund Terminologies: Things To Know Before you Invest"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"12548\" class=\"elementor elementor-12548\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-23ba90b elementor-section-full_width tab_container elementor-section-height-default elementor-section-height-default\" data-id=\"23ba90b\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-b6a6f9f\" data-id=\"b6a6f9f\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-e0f864e elementor-section-full_width elementor-section-height-default elementor-section-height-default\" data-id=\"e0f864e\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-wide\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-7efb245 chapters_list\" data-id=\"7efb245\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-33d4575 elementor-widget elementor-widget-shortcode\" data-id=\"33d4575\" data-element_type=\"widget\" data-widget_type=\"shortcode.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-shortcode\">\t<script>\n\t\tjQuery(document).ready(function(){\n\t\t\tjQuery(\"#post_chapters a[href*='\" + location.pathname + \"']\").addClass(\"current\");\n\t\t})\n\t<\/script>\n\t<div class=\"desktop_chapters\"><div id=\"post_chapters\"><div class=\"post_chapters-heading\">Chapters<\/div><ul><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/introduction-to-mutual-funds\/\">Introduction<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/nfo-offer-documents\/\">NFO & Offer Documents<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/mutual-funds-classification\/\">Learn About Classification of Mutual Funds From Mutual Fund Course<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/things-to-know-before-buying-mutual-funds\/\">Things To Know Before Buying MFs<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/measuring-risk-return-of-mutual-fund\/\">Understand Measures of Risk &#038; Return in Mutual Fund<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/what-are-exchange-traded-funds\/\">What Are ETFs<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/what-are-liquid-funds\/\">What Are Liquid Funds<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/taxation-of-mutual-funds\/\">Taxation of Mutual Funds<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/mutual-fund-investment-redemption-plan\/\">Mutual Fund Investment & Redemption Plan<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/regulation-of-mutual-funds\/\">Regulation of Mutual Funds<\/a><\/li><\/ul><\/div><\/div><div class=\"chapters_toggle\" title=\"chapters\"><a title=\"chapters\" href=\"#\" id=\"open_chapters\"><span>View Chapters<\/span>&nbsp;&nbsp;&nbsp;<i class=\"fa fa-chevron-right\"><\/i><\/a><a title=\"chapters\" href=\"#\" id=\"close_chapters\" style=\"display:none;\"><span>Hide Chapters<\/span>&nbsp;&nbsp;&nbsp;<i class=\"fa fa-chevron-right\"><\/i><\/a><\/div>\t<script>\n\t\tjQuery(document).ready(function(){\n\t\t\tjQuery('.chapters_toggle #open_chapters').click(function(e){\n\t\t\t\te.preventDefault();\n\t\t\t\tjQuery('.desktop_chapters').css(\"left\",\"0px\");\n\t\t\t\tjQuery('#open_chapters').css(\"display\",\"none\");\n\t\t\t\tjQuery('#close_chapters').css(\"display\",\"block\");\n\t\t\t\t\/\/jQuery('.chapters_toggle').css(\"width\",\"200px\");\n\t\t\t})\n\t\t\tjQuery('.chapters_toggle 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<div data-scroll-on-click=\"no\" data-scroll-speed=\"300\" id=\"eael-advance-tabs-90f6d06\" class=\"eael-advance-tabs eael-tabs-horizontal eael-tab-auto-active \" data-tabid=\"90f6d06\">\n            <div class=\"eael-tabs-nav \">\n                <ul class=\"eael-tab-inline-icon\" role=\"tablist\">\n                                            <li id=\"study\" class=\"active-default eael-tab-item-trigger eael-tab-nav-item\" aria-selected=\"true\" data-tab=\"1\" role=\"tab\" tabindex=\"0\" aria-controls=\"study-tab\" aria-expanded=\"false\">\n                            \n                                                                <i class=\"far fa-edit\"><\/i>                                                            \n                                                            <span class=\"eael-tab-title title-after-icon\" >Study<\/span>                            \n                                                    <\/li>\n                                            <li 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          \n                                                            <span class=\"eael-tab-title title-after-icon\" >Videos<\/span>                            \n                                                    <\/li>\n                    \n                                  <\/ul>\n            <\/div>\n            \n            <div class=\"eael-tabs-content\">\n\t\t        \n                    <div id=\"study-tab\" class=\"clearfix eael-tab-content-item active-default\" data-title-link=\"study-tab\">\n\t\t\t\t        <p><div class='white' style='background:rgb(255, 255, 255); border:solid 0px rgb(255, 255, 255); border-radius:0px; padding:0px 0px 0px 1px;'>\n<div id='text_slider' class='owl-carousel sa_owl_theme owl-pagination-true' data-slider-id='text_slider' style='visibility: visible;visibility:visible;'>\n<div id='text_slider_slide01' class='sa_hover_container' data-hash='What-is-NAV' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>4.1 What is NAV?<\/strong><\/h2>\r\n<p><img fetchpriority=\"high\" decoding=\"async\" class=\"alignnone wp-image-48841 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-NAV-1.png\" alt=\"What is NAV\" width=\"1080\" height=\"788\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-NAV-1.png 1080w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-NAV-1-300x219.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-NAV-1-1024x747.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-NAV-1-768x560.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-NAV-1-50x36.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-NAV-1-100x73.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-NAV-1-150x109.png 150w\" sizes=\"(max-width: 1080px) 100vw, 1080px\" \/><\/p>\r\n<p>&nbsp;<\/p>\r\n<p>Anand: What is NAV in funds?<\/p>\r\n<p>Ridhima: The NAV in funds is the value of each unit of the mutual fund. It is calculated by taking the assets of the mutual fund and subtracting the liabilities then dividing that by the total number of units that have been issued.<\/p>\r\n<p>Anand: Does the NAV in funds change daily?<\/p>\r\n<p>Ridhima: Yes the NAV in funds does change daily because the prices of the assets that the mutual fund owns and the liabilities of the mutual fund change every day. That is why the NAV in funds is updated every day.<\/p>\r\n<p>Anand: Why is mark-to-market so important for funds?<\/p>\r\n<p>Ridhima: Mark-to-market is important for funds because it values the securities that the mutual fund owns at the current market price, which makes sure that investors who are buying or redeeming units of the mutual fund are getting a fair value for their money.<\/p>\r\n<p>The Net Asset Value of a fund is, at its core, the value of a single unit of that fund. It\u2019s calculated by taking the total value of everything the fund owns, subtracting its liabilities, and dividing the result by the number of units in issue. The NAV is the price at which investors buy or sell fund units.<\/p>\r\n<p>Suppose, for instance, that a fund holds securities worth \u20b9100 and has liabilities of \u20b910 \u2014 its Net Asset Value would be \u20b990. Because the value of a fund\u2019s holdings and liabilities changes every day, its NAV changes just as regularly.<\/p>\r\n<p><strong><b>The formula to calculate the Net Asset Value is<\/b><\/strong><\/p>\r\n<p><strong><b>Net Asset Value = (Total Assets \u2212 Liabilities) \/ Number of Units<\/b><\/strong><\/p>\r\n<p>A fund\u2019s assets consist of its investments in stocks, bonds, and other instruments, while its liabilities cover the expenses and obligations it owes.<\/p>\r\n<p>Valuing a fund\u2019s net assets follows a set of specific rules:<\/p>\r\n<ul>\r\n<li>Listed securities are valued at their closing market price.<\/li>\r\n<li>Illiquid shares or debentures are valued at the lower of book value or the last available price.<\/li>\r\n<li>Traded bonds and debentures are valued at the lower of their closing traded value or yield value.<\/li>\r\n<li>Fixed-income securities are valued based on their yield.<\/li>\r\n<\/ul>\r\n<p>This methodology ensures that a fund\u2019s NAV reflects a genuinely transparent picture of its holdings.<\/p>\r\n<p>Mutual funds and Unit Investment Trusts are required to calculate their NAV once every business day, based on closing market prices \u2014 a daily discipline that lets investors track the performance of their investments closely. Closed-end funds are the one exception, since their shares aren\u2019t redeemable on demand.<\/p>\r\n<p>SEBI\u2019s guidelines also govern how mutual funds calculate their dividend reserves:<\/p>\r\n<ul>\r\n<li>A fund\u2019s profits, including income earned, are what\u2019s available for distribution.<\/li>\r\n<li>Valuation gains are excluded, while valuation losses must be adjusted against profits.<\/li>\r\n<li>Dividends can only be declared when there is a genuine surplus.<\/li>\r\n<\/ul>\r\n<p>For example, suppose an investor buys units of a fund at a NAV of \u20b914, when the unit\u2019s face value is \u20b910 \u2014 meaning a \u20b94 premium. If the NAV later rises to \u20b917, the fund may declare a dividend of \u20b93, though the unit premium reserve itself cannot be used to fund dividend payouts.<\/p>\r\n<p>Mark-to-market is the process of valuing each security in a portfolio at its current market price. This matters because:<\/p>\r\n<ul>\r\n<li>It gives an accurate picture of the fund\u2019s profit or loss at the end of each day.<\/li>\r\n<li>It ensures investors buy or redeem units at a genuinely fair value.<\/li>\r\n<li>It helps assess both the scheme\u2019s performance and the fund manager\u2019s effectiveness.<\/li>\r\n<\/ul>\r\n<p><strong><b>Let us consider an example. Suppose a mutual fund has:<\/b><\/strong><\/p>\r\n<ul>\r\n<li>Assets worth \u20b91,00,000 (stocks, bonds, etc.)<\/li>\r\n<li>Liabilities of \u20b910,000<\/li>\r\n<li>Outstanding units: 9,000<\/li>\r\n<\/ul>\r\n<p><strong><b>The Net Asset Value is calculated as:<\/b><\/strong><\/p>\r\n<p>NAV = (\u20b91,00,000 \u2212 \u20b910,000) \/ 9,000 = \u20b910 per unit<\/p>\r\n<p>So, the NAV of the fund is \u20b910 per unit. If you invest \u20b950,000, you will receive 5,000 units. If the NAV rises to \u20b912, your investment value becomes \u20b960,000.<\/p><\/div>\n<div id='text_slider_slide02' class='sa_hover_container' data-hash='What-Is-Expense-Ratio' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>4.2 What Is Expense Ratio?<\/strong><\/h2>\r\n<p><img decoding=\"async\" class=\"alignnone wp-image-48842 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-Expense-Ratio.png\" alt=\"What is Expense Ratio\" width=\"1090\" height=\"886\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-Expense-Ratio.png 1090w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-Expense-Ratio-300x244.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-Expense-Ratio-1024x832.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-Expense-Ratio-768x624.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-Expense-Ratio-50x41.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-Expense-Ratio-100x81.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/What-is-Expense-Ratio-150x122.png 150w\" sizes=\"(max-width: 1090px) 100vw, 1090px\" \/><\/p>\r\n<p>&nbsp;<\/p>\r\n<p><strong>Anand:<\/strong> What is the expense ratio of a fund?<\/p>\r\n<p><strong>Ridhima:<\/strong> The expense ratio of a fund is the annual fee that the mutual fund charges for managing the mutual fund administering the mutual fund and distributing the mutual fund.<\/p>\r\n<p><strong>Anand<\/strong>: How does the expense ratio of a fund affect the returns of the mutual fund?<\/p>\r\n<p><strong>Ridhima<\/strong>: If a mutual fund earns a return of 10 percent but has an expense ratio of 1 percent then the net return of the fund will be 9 percent. Over time a higher expense ratio can reduce the wealth of the investor in the fund.<\/p>\r\n<p><strong>Anand:<\/strong> So I should compare the expense ratios of mutual funds?<\/p>\r\n<p><strong>Ridhima:<\/strong> Exactly you should compare the expense ratios of mutual funds but you should also check the consistency of the returns of the mutual funds and the skill of the fund manager of the mutual funds.<\/p>\r\n<p>The expense ratio is a key concept every mutual fund investor should understand. It\u2019s the portion of a fund\u2019s assets that the AMC deducts each year to cover its costs, usually expressed as a percentage of those assets.<\/p>\r\n<p><strong><b>The Expense Ratio is made up of a few parts:<\/b><\/strong><\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Administration Fee: <\/b><\/strong>What fund managers earn for managing the fund \u2014 typically 0.5% to 1% of the fund\u2019s assets annually.<\/li>\r\n<li><b><\/b><strong><b>Administrative Costs: <\/b><\/strong>The day-to-day costs of running the fund, such as customer service and record-keeping.<\/li>\r\n<li><b><\/b><strong><b>Distribution Fees: <\/b><\/strong>The costs incurred in promoting the fund to attract new investors.<\/li>\r\n<\/ul>\r\n<p>The expense ratio matters because it directly reflects the cost of investing in a particular fund. If you invest \u20b91,00,000 in a fund with a 1% expense ratio, for example, you\u2019ll pay \u20b91,000 in fees every year \u2014 so a fund delivering 10% gross returns effectively hands you 9% after fees.<\/p>\r\n<p>Over time, even a modest difference in expense ratio can have an outsized impact on your final corpus.<\/p>\r\n<p><strong><b>For example:<\/b><\/strong><\/p>\r\n<ul>\r\n<li>If you invest \u20b91,00,000 and it compounds at 10% annually for 10 years, you\u2019d end up with roughly \u20b92.6 lakh. With a 2% expense ratio dragging your effective return down to 8%, you\u2019d end up with only about \u20b92.15 lakh.<\/li>\r\n<li>The expense ratio is especially important for debt funds, since their returns are typically more modest to begin with \u2014 a high expense ratio eats into those already-thin margins even more noticeably.<\/li>\r\n<li>When comparing mutual funds, the expense ratio deserves close attention, but it shouldn\u2019t be the only factor \u2014 consistency of returns and the fund manager\u2019s track record matter just as much.<\/li>\r\n<\/ul>\r\n<p><strong><b>Here is a simple example:<\/b><\/strong><\/p>\r\n<p>Suppose you invest \u20b950,000 in a fund with a 1% expense ratio \u2014 the annual cost works out to \u20b9500. If the fund delivers a 12% gross return, that\u2019s a gain of \u20b96,000; after fees, your net gain is \u20b95,500, meaning your actual return is closer to 11%, not the headline 12%.<\/p><\/div>\n<div id='text_slider_slide03' class='sa_hover_container' data-hash='Portfolio-Turnover' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:400px; '><h2 style=\"text-align: left\"><strong>4.3 Portfolio Turnover<\/strong><\/h2>\r\n<p><img decoding=\"async\" class=\"alignnone wp-image-48843 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Portfolio-Turnover-Ratio.png\" alt=\"Portfolio Turnover Ratio\" width=\"1080\" height=\"934\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Portfolio-Turnover-Ratio.png 1080w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Portfolio-Turnover-Ratio-300x259.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Portfolio-Turnover-Ratio-1024x886.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Portfolio-Turnover-Ratio-768x664.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Portfolio-Turnover-Ratio-50x43.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Portfolio-Turnover-Ratio-100x86.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Portfolio-Turnover-Ratio-150x130.png 150w\" sizes=\"(max-width: 1080px) 100vw, 1080px\" \/><\/p>\r\n<p>&nbsp;<\/p>\r\n<p><strong><b>Anand:<\/b><\/strong>\u00a0What is portfolio turnover in a fund?<\/p>\r\n<p><strong><b>Ridhima:<\/b><\/strong>\u00a0The portfolio turnover of a fund shows how often the fund manager of the mutual fund buys and sells securities.<\/p>\r\n<p><strong><b>Anand:<\/b><\/strong>\u00a0Does a high portfolio turnover mean returns for the mutual fund?<\/p>\r\n<p><strong><b>Ridhima:<\/b><\/strong>\u00a0Not always a high portfolio turnover can mean costs for the mutual fund and a low portfolio turnover can often signal stability in the mutual fund.<\/p>\r\n<p><strong><b>Anand:<\/b><\/strong>\u00a0How is the portfolio turnover ratio of a fund measured?<\/p>\r\n<p><strong><b>Ridhima:<\/b><\/strong>\u00a0The portfolio turnover ratio of a fund is measured by the formula: portfolio turnover ratio equals the lesser of the purchases or sales of the mutual fund divided by the average assets under management of the mutual fund.<\/p>\r\n<p>The Portfolio Turnover Ratio (PTR) is another important metric in evaluating a mutual fund. It measures how frequently the fund manager buys and sells securities, expressed as a percentage, and offers a window into the manager\u2019s investing style.<\/p>\r\n<p>A high PTR indicates the fund manager is trading securities frequently \u2014 which can be costly and isn\u2019t always a sign of skill. A low PTR, by contrast, suggests a more measured approach that tends to be both less expensive and more stable.<\/p>\r\n<p><strong><b>The formula for the Portfolio Turnover Ratio is:<\/b><\/strong><\/p>\r\n<p><strong><b>PTR = (Lesser of Purchases or Sales) \/ Average Assets Under Management<\/b><\/strong><\/p>\r\n<p>For example, suppose a fund bought securities worth \u20b970 crore and sold securities worth \u20b950 crore in a year, with average assets under management of \u20b9500 crore. The PTR would be:<\/p>\r\n<p>PTR = 50 \/ 500 = 10%<\/p>\r\n<p>This means 10% of the portfolio was churned during the year.<\/p>\r\n<p>The Portfolio Turnover Ratio can affect investors in a few key ways:<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Costs: <\/b><\/strong>A high PTR can drive up costs, which in turn reduces net returns.<\/li>\r\n<li><b><\/b><strong><b>Returns: <\/b><\/strong>A high PTR doesn\u2019t necessarily translate into better returns \u2014 in fact, it can sometimes have the opposite effect.<\/li>\r\n<li><b><\/b><strong><b>Strategy: <\/b><\/strong>The PTR offers useful insight into the fund manager\u2019s overall investment strategy.<\/li>\r\n<\/ul>\r\n<p>Assets Under Management (AUM) refers to the total value of investments a fund is managing \u2014 a useful gauge of the fund\u2019s size and standing in the market.<\/p>\r\n<p>AUM also has a direct bearing on the PTR: a larger AUM base tends to produce a lower PTR, even if the fund manager is actively buying and selling. For instance, if a fund sells \u20b950 crore and buys \u20b970 crore worth of securities in a year against an average AUM of \u20b9500 crore, the PTR still works out to 10% \u2014 even though a substantial amount of trading activity took place behind that number.<\/p><\/div>\n<div id='text_slider_slide04' class='sa_hover_container' data-hash='Exit-Loads' style='padding:4.9% 5%; margin:0px 0%; min-height:400px; '><h2 style=\"text-align: left\"><strong>4.4 Exit Loads<\/strong><\/h2>\r\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-48844 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Exit-Loads-in-Mutual-Fund.png\" alt=\"Exit Loads In Mutual Fund\" width=\"1080\" height=\"968\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Exit-Loads-in-Mutual-Fund.png 1080w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Exit-Loads-in-Mutual-Fund-300x269.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Exit-Loads-in-Mutual-Fund-1024x918.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Exit-Loads-in-Mutual-Fund-768x688.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Exit-Loads-in-Mutual-Fund-50x45.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Exit-Loads-in-Mutual-Fund-100x90.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Exit-Loads-in-Mutual-Fund-150x134.png 150w\" sizes=\"(max-width: 1080px) 100vw, 1080px\" \/><\/p>\r\n<p><strong>Anand:<\/strong> What are exit loads in a fund?<\/p>\r\n<p><strong>Ridhima:<\/strong> Exit loads in a fund are fees that are charged if you withdraw your money from the mutual fund within a certain period of time.<\/p>\r\n<p><strong>Anand:<\/strong> Why do mutual funds charge exit loads?<\/p>\r\n<p><strong>Ridhima<\/strong>: Mutual funds charge exit loads to encourage investors to invest for the term and to protect the interests of the other investors, in the mutual fund.<\/p>\r\n<p><strong>Anand<\/strong>: Can you give me an example of how exit loads work in a fund?<\/p>\r\n<p><strong>Ridhima:<\/strong> For example if you withdraw \u20b950,000 from a fund within a year and the exit load is 1 percent then you will have to pay an exit load of \u20b9500 and you will get back \u20b949,500.<\/p>\r\n<p>Exit loads are fees mutual fund companies charge when investors withdraw their money within a specified period, typically calculated as a percentage of the value being redeemed.<\/p>\r\n<p>Their purpose is straightforward: to encourage investors to stay invested for a meaningful period, protect the interests of long-term unit-holders, and give the fund manager more room to make sound investment decisions without the pressure of frequent redemptions.<\/p>\r\n<p>The exit load is determined by two factors:<\/p>\r\n<ul>\r\n<li>The percentage fee charged on the redemption amount.<\/li>\r\n<li>The exit load period \u2014 the window of time during which the fee applies.<\/li>\r\n<\/ul>\r\n<p>For example, suppose a fund charges a 1% exit load on withdrawals made within 365 days. Withdrawing \u20b950,000 after 4 months would incur:<\/p>\r\n<p><strong><b>Exit load = 1% \u00d7 \u20b950,000 = \u20b9500<\/b><\/strong><\/p>\r\n<p>You would receive \u20b949,500 of the original \u20b950,000.<\/p>\r\n<p>Exit loads can get slightly more complex with SIP investments, since each instalment carries its own independent exit-load timeline.<\/p>\r\n<p>Understanding exit loads matters because they directly affect how much money you actually receive on withdrawal. Short-term investors should pay close attention to a fund\u2019s exit load structure to avoid unpleasant surprises, while long-term investors are unlikely to be affected, since they won\u2019t be redeeming for a long while regardless.<\/p>\r\n<p>When comparing mutual funds, it\u2019s worth weighing the exit load alongside the expense ratio and historical returns \u2014 together, these give a much fuller picture of which fund is right for you.<\/p>\r\n<p>Here\u2019s another example: suppose you invest \u20b920,000 in a fund with a 2% exit load applicable to withdrawals made within 6 months. If your investment grows to \u20b922,000 and you withdraw after 3 months, the exit load works out to:<\/p>\r\n<p>Exit load = 2% \u00d7 \u20b922,000 = \u20b9440<\/p>\r\n<p>You would receive \u20b921,560 of the \u20b922,000.<\/p>\r\n<p>Exit loads aren\u2019t a permanent feature of every fund, and their purpose is simply to encourage disciplined investing and support sound fund management. Even so, it\u2019s worth understanding the exit load structure of any fund you invest in, so you can plan ahead and avoid surprises when the time comes to withdraw.<\/p>\r\n<p><strong><b>Case Study: Exit Load in Practice<\/b><\/strong><\/p>\r\n<p>In December 2025, Karthik, a 32-year-old software engineer from Bengaluru, invested his annual bonus of \u20b94 lakh into the HDFC Flexi Cap Fund \u2014 Direct Growth. His goal was to save for a home purchase within five years.<\/p>\r\n<p>By May 2026, just five months later, Karthik and his wife finalised a 2BHK flat in Whitefield. To arrange the down payment, he redeemed his mutual fund investment.<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Fund Value at Redemption: <\/b><\/strong>\u20b94.30 lakh<\/li>\r\n<li><b><\/b><strong><b>Exit Load Policy: <\/b><\/strong>1% if redeemed within 1 year<\/li>\r\n<li><b><\/b><strong><b>Exit Load Deduction: <\/b><\/strong>\u20b94,300 (1% of \u20b94.30 lakh)<\/li>\r\n<li><b><\/b><strong><b>Final Amount Credited: <\/b><\/strong>\u20b94,25,700<\/li>\r\n<\/ul>\r\n<p>Of this deduction, about \u20b9780 went as GST, while the remaining \u20b93,520 was credited back to the scheme\u2019s revenue account \u2014 meaning other investors in the fund indirectly benefited from his early withdrawal.<\/p>\r\n<p>This case illustrates that exit loads aren\u2019t simply a penalty; they also serve as a mechanism that protects long-term investors by discouraging short-term exits.<\/p>\r\n<p><strong><b>Key Lessons for Investors<\/b><\/strong><\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Understand Exit Load Timelines: <\/b><\/strong>Most equity funds in India charge 1% if redeemed within 1 year. Debt funds often have shorter exit load periods (30\u201390 days).<\/li>\r\n<li><b><\/b><strong><b>Plan Liquidity Needs: <\/b><\/strong>If you anticipate needing funds within a year, avoid schemes with high exit loads.<\/li>\r\n<li><b><\/b><strong><b>Impact on SIPs: <\/b><\/strong>Each SIP instalment has its own exit load timeline. Redeeming early can trigger multiple deductions.<\/li>\r\n<li><b><\/b><strong><b>Compare Funds: <\/b><\/strong>Some fund houses like ICICI Prudential and WhiteOak Capital have reduced or eliminated exit loads to attract investors.<\/li>\r\n<\/ul>\r\n<p><strong><b>Practical Checklist Before Investing<\/b><\/strong><\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Check Exit Load Policy <\/b><\/strong>in the Scheme Information Document.<\/li>\r\n<li><b><\/b><strong><b>Match Investment Horizon <\/b><\/strong>with fund rules to avoid surprises.<\/li>\r\n<li><b><\/b><strong><b>Compare Alternatives: <\/b><\/strong>Some funds now offer lower or nil exit loads.<\/li>\r\n<li><b><\/b><strong><b>Factor in Taxes: <\/b><\/strong>Even if exit loads are low, short-term capital gains tax applies if redeemed within a year.<\/li>\r\n<\/ul><\/div>\n<\/div>\n<\/div>\n<script type='text\/javascript'>\n\tjQuery(document).ready(function() {\n\t\tjQuery('#text_slider').owlCarousel({\n\t\t\titems : 1,\n\t\t\tsmartSpeed 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allowfullscreen=\"allowfullscreen\"><\/iframe><\/div>                    <\/div>\n\t\t                    <\/div>\n        <\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>Study Slides Videos 4.1 What is NAV? An investing company&#8217;s &#8220;net asset value,&#8221; or &#8220;NAV,&#8221; is the sum of its total assets less its liabilities. For example, if an investment business has Rs.100 in securities and other assets and Rs.10 in liabilities, its net asset value (NAV) is Rs90. 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