Exit load is the commission or charge paid when an investor exits a mutual fund. The charges are levied to discourage withdrawals by investors from mutual fund schemes. Having said that, different mutual fund houses charge different fees as an exit load. Exit loads are charged as a small percent of the Net Asset Value prevailing at the time when you sell your schemes.
Let’s say, you recently sold some of your mutual fund investment and you notice a redemption amount in your bank account, you’d realise the amount is a little less than what you’d have expected and it would leave you wondering where the money went?
Well, it would have gone in the exit load, which are imposed to discourage investors from hopping in and out of schemes. The information would be available in the scheme information document or SID.
If you have been a SIP investor you wouldn’t understand the concept of exit load. If you invest via SIPs the holding period is applicable for every instalment of SIP. Once your first SIP has completed a year only that instalment would not be charged the exit load on redemption, else all other instalments held for less than a year would have attracted an exit load.
How is it calculated?
Let’s say you sell 500 units of an equity scheme you purchased four months ago. If you redeem it before one year your exit load would be 1 percent. Let’s assume the NAV is Rs 100. You would get Rs 99 per unit (Rs 100 – Rs 1 (1 percent of 100) on redemption. The total amount which you’d get would be Rs 49,500 (Rs 99 X 500 units). It means you would have paid an exit load of Rs 500 (Rs 1 per unit)
Merging of schemes
In the near future for whatever reason the exit load will not be applicable under such circumstances. In such cases, investors are provided with the option of opting out from the fund and can retrieve the amount in a specific time window. A failure to opt out within the time window would attract on exit load.
If you are wondering what happens to the money paid as exit load, well it’s added to the fund for reinvestment. Earlier the money was used to fund activities like marketing operations but in 2012 SEBI mandated the money should be put back in the fund so it can be reinvested so it can benefit investors who are invested in the fund.Remember, when you are looking for various options to invest the exit load should not be a big concern, however, when you plan on redeeming your investment from a mutual fund, you would need to plan it according to the exit load.