June 22, 2024
New Delhi
Finance Mutual Funds

What is Exit Load in Mutual Funds?

Exit Load in Mutual Funds

What is Exit Load in Mutual Funds? Mutual funds are independent trust-like organizations that collect investment funds from different interested parties and invest them in a variety of assets. It is good for those who don’t have sufficient time to study the market or have any knowledge about investment. Such people don’t need to worry about rebuilding their portfolio during the fluctuations of the market because the fund manager is already there and expertly manages this investment pool. 

Read: How to Add Nominee to Mutual Funds

Read: What is The Difference Between SIP and Mutual Fund?

Its working can be compared to a trust that collects money from numerous investors whose goals are almost identical in financial terms. After collecting money, it invests the funds in securities such as stocks, bonds, money market instruments, and other investments. Each investor owns a share of the fund’s holdings in the form of units. 

The net asset value (NAV) of an investment in a mutual fund scheme can be calculated to determine the income or gains of the investors in this collective investment. The return on the investment is decided proportionately among the investors. Certain costs are also deducted from the gains.

Through investing in mutual funds, small investors can benefit from a professionally managed portfolio of stocks, bonds, and other securities that is not possible for them to understand or manage. As a result, each stakeholder shares in the fund’s gains or losses in an equitable manner.

The overall market value is the key factor in the success of a mutual fund. This success of mutual funds is calculated on the basis of all the profit and loss of all the investments that you make. The money invested in mutual funds is reinvested in many different types of assets.

‘Loads’ In Mutual Funds

The special cost charged by mutual funds for your investments in different assets is called ‘loads, The term “load” refers to this charge. The trust of mutual funds is paid a fee each time an investor enters or exits a mutual fund scheme. This entry and exit charge is known as a load,” which is charged by the investor.

There are two types of loads in mutual funds: exit loads, which are charged at the time of sale, and transaction loads. Entry loads are charged on purchases. There are mainly two types of loads:

  • Entry load: The term “entry load” refers to the charges of mutual funds, which are charged by mutual funds as a fee when you buy them.
  • Exit Load: The term “exit load” is used for charges made in mutual funds as a fee when you sell your asset. An exit load can be described as a fee or sum charged to an investor for leaving a portfolio investment.

By requesting that the broker waive the load, an investor may occasionally be able to minimize the cost. Always keep in mind to compare the mutual fund’s risk and objectives, as well as its internal costs and sales charges, when looking for a suitable mutual fund for yourself.

What is An Exit Load in Mutual Funds?

The expense ratio is not related to the exit burden as an expense ratio. Investors have unlimited access to their money. It is intended to discourage investors from leaving a mutual fund scheme by charging them this fee, thereby lowering the number of withdrawals from mutual funds. Various mutual fund firms place varying weights on exit loads.

If you sell your investment back to a mutual fund within a certain time frame, the fund will charge you an exit load. The exit burden is assessed to deter investors from selling their stock too soon, giving it time to become profitable for them.

When the investor withdraws from any investment scheme completely or in part within a predetermined time frame, exit loads are imposed. This fee is decided by mutual fund companies. There are also many schemes that don’t have any exit loads. Mutual Fund companies charge exit loads so that investors keep themselves from selling their shares before the deadline.

‘Exit Loads’ for Various Mutual Fund Types

If the investors redeem their money before the set deadline, mutual fund companies impose exit loads on the investors. The amount of the exit load depends on the kind of mutual fund. It varies in size. There are different types of mutual funds, and the size of the exit load depends on their kind. Following are the different types of mutual funds that have different exit loads:

  • Equity Funds: Equity funds have higher exit loads in comparison to debt funds. The more exit loads that are charged, the less frequently investors will go for redemption. The heavy exit loads deter frequent redemptions, as equity funds are good for long-term investment. Exit load is a kind of fee that investors have to pay when they proceed with the redemption of their shares before a set tenure in actively managed equity funds.
  • Debt Funds: As we have already discussed, in debt funds, fewer exit fees are charged in comparison to equity funds’ fees. Debt funds typically charge smaller exit loads. There are some debt funds that do not impose exit loads; these are overnight funds, and with the majority of ultra-short-duration funds, investors can redeem their investments without paying exit load fees because these funds are made for investments with short time horizons. There are many plans within particular categories of debt funds that don’t charge exit loads. These plans are related to banking and PSU funds. Moreover, there are a few schemes of overnight and ultra-short-duration funds that also do not impose exit loads.
  • Hybrid Funds: If you invest in hybrid funds, including arbitrage funds, you are supposed to pay exit loads in case you go for early redemption. Investments in these funds are good for those who are looking for a balanced strategy because they give them a chance to invest in a variety of stock and debt assets. Many investors are under the impression that in arbitrage funds, like overnight funds, they do not have to pay any exit loads. The majority of arbitrage funds follow this. But it is only possible when redemptions are made within a predetermined window of time, typically between 15 and 30 days. Those investors who are interested in investing in arbitrage funds and also want to avoid exit load fees should take an investment period of at least one month.

Calculation Of The Exit Load

It can be difficult to calculate the exit load. For making the process of calculation easy, an exit load calculator can be a good option. This exit load calculator can accurately determine the fee you are to be assessed, and you should be glad to know that this assessment is made within no time without taking any pain.

At the time of redemption of mutual fund units, the percentage of net asset value (NAV) is calculated. On the basis of this percentage, the exit load of a mutual fund is assessed. The net asset value (NAV) of a corporation is its total assets minus its liabilities.

Before crediting the proceeds to the investors, the exit load is subtracted from the NAV. The proportion of the exit load that is imposed on investors is subtracted from the NAV. This is basically the decision of fund managers about how much exit load is to be charged to investors.

The exit load charged by mutual funds can range from 0.5% to 2% of the NAV. 

It all depends on the type of scheme and the tenure of the investment as to how much exit load is to be charged. The exit load affects the NAV as it is reduced by the exit load. For instance, if the fund charges a 1% exit load and the NAV at the time of redemption is Rs 10, the investor will receive his redemption amount at a rate of Rs 9.90 per share.

Conclusion

Before proceeding with any investment in Mutual Funds, you must have knowledge of the exit load structure of the scheme in which you are going to make an investment. It will help you make wise investment decisions. You are well aware that if you plan to invest for a short period of time, that will not be helpful in making good returns. 

For the participants in mutual funds, a proper understanding of exit load structure is very useful in order to safeguard their financial interests in different plans. There are many mutual fund companies that impose varying exit loads for various schemes. Therefore, it is advisable to understand the nuances of exit load structure.

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