Many mutual fund investors may not be fully aware of all the fees and charges associated with these investments. One such charge that can significantly impact returns is the exit load. Understanding what exit load means and how it’s calculated is crucial for making informed investment decisions.
What is exit load in mutual funds?
Exit load refers to a fee charged by asset management companies (AMCs) when an investor redeems or sells their mutual fund units before a specified period. This fee is typically expressed as a percentage of the net asset value (NAV) of the units being redeemed. The primary purpose of exit load is to discourage short-term investing and frequent trading in mutual fund schemes. By imposing this fee, AMCs aim to protect the interests of long-term investors and maintain the stability of the fund.
Why do mutual funds charge exit load?
There are several reasons why mutual fund schemes impose exit loads. Exit loads help prevent investors from frequently buying and selling fund units, which can disrupt the fund’s investment strategy and increase costs for all investors.
When investors redeem their units, the fund may need to sell underlying securities to meet redemption requests. Exit loads help offset these transaction costs.
Exit loads allow fund managers to invest in less liquid securities without worrying about sudden large redemptions affecting the fund’s performance.
How is exit load calculated?
The calculation of exit load depends on several factors, including the type of mutual fund, the duration of investment, and the specific terms set by the AMC. Here’s a general formula for calculating exit load –
Exit load = Exit load rate × NAV × Number of units redeemed
Let’s break this down with an example.
Suppose you invested Rs. 100,000 in a mutual fund scheme with an exit load of 1% if redeemed within one year. After eight months, you decide to redeem your investment when the NAV is Rs. 12 per unit.
Number of units held = Initial investment / NAV at purchase
= 100,000 / 10 (assuming initial NAV was Rs. 10)
= 10,000 units
Current value of investment = NAV at redemption × Number of units
= 12 × 10,000
= Rs. 120,000
Exit load amount = Exit load rate × Current value of investment
= 1% × 120,000
= Rs. 1,200
Net redemption amount = Current value of investment – Exit load amount
= 120,000 – 1,200
= Rs. 118,800
In this example, the investor would receive Rs. 118,800 instead of the full Rs. 120,000 due to the exit load charge.
Conclusion
Understanding exit loads is crucial for making informed decisions about mutual fund investments. While exit loads can impact short-term returns, they play an important role in protecting the interests of long-term investors and maintaining fund stability. By carefully considering exit load structures, aligning investment horizons with fund objectives, and employing appropriate strategies, investors can minimize the impact of exit loads on their overall returns.