What is Exit Load in Mutual Fund?

An exit loan is one of the costs that occurs when you put your money in mutual funds. Mutual fund companies charge a fee when you buy or sell your mutual fund units before a certain period. The exit load tries to stop investors from taking out their money too soon. In this blog, we’ll take a close look at exit load in mutual funds, what it means for you, and how it affects your investment plans.

Exit Load in Mutual Fund: An Overview

Exit load is a charge that mutual funds put on investors who leave the scheme too. How long you need to stay and how much you have to pay to leave depend on the type of mutual fund. If you take your money out of equity funds within a year of putting it in, you’ll have to pay an exit load. These funds are meant for the long haul after all. Debt funds or liquid funds though? They might have smaller exit loads or none at all.

The main reason to charge an exit load is to stop frequent trading and short-term investing. Mutual funds are made for long-term investments, and fund managers need a steady pool of money to invest well. By having an exit load mutual funds push investors to keep their money in for longer, which fits with what the fund wants to do.

What Exit Load Means

Exit load is a percentage of the net asset value (NAV) of the mutual fund units you sell. Let’s say a mutual fund has an exit load of 1%. If you choose to cash out your investment of ₹1,00,000 during the exit load period, you’ll pay ₹1,000 as an exit load. The remaining ₹99,000 will go into your account.

Exit Load in Mutual Fund After 1 Year

All mutual funds have their different rules about when the exit load stops. As for equity funds, you pay this fee if you cash out within a year. But after you’ve been in for a year most equity funds don’t charge an exit load. This pushes investors to keep their money in for at least 12 months to avoid paying extra.

Why Do Mutual Funds Have an Exit Fee?

Mutual funds have an exit fee for a few reasons:

1. Discouraging Short-Term Trading: Mutual funds don’t work well for quick trading. Buying and selling often increases costs and messes up the fund’s investment plan. The exit load has an impact on investors making them think twice before cashing out too. This pushes them to keep their money in for longer.
2. Maintaining Fund Stability: Keeping a mutual fund’s assets steady is key to reaching its investment goals. When people take their money out, the fund might need to sell stuff to get cash. This can throw off the investment strategy and hurt returns for other investors.
3. Balancing for Liquidity Costs: Fund managers often need to sell assets to meet redemption requests. The exit load helps to cover these costs making sure other investors don’t take a hit.
4. Protecting Long-Term Investors: Exit loads help to safeguard the interests of investors who stay in for the long haul. By making early exits less attractive, fund managers can focus on investments that bring better returns over time.

Exit Load Calculator: How to Calculate Exit Load?

Knowing how to figure out the exit load can help you plan your investments more. The calculation of the exit load depends on the NAV of the mutual fund units you are selling. Here is how you can calculate it:

Find the NAV: Look up the NAV of the mutual fund on the day you’re selling.

1. Check the Exit Load Percentage: Check thoroughly your scheme information document to know what exit load percentage applies to your investment.
2. Work out the Exit Load: Now simply, multiply the NAV with the exit load percentage to know how much you pay.

Types of Mutual Funds and Their Exit Loads

Different mutual funds have different exit load structures. Knowing these can help you pick the right fund to meet your investment goals.

1. Equity Funds: Most equity mutual funds have a 1% exit load if you cash out within a year. Once you pass the one-year mark, you don’t pay any exit load.
2. Debt Funds: The exit load on debt funds depends on how long the fund runs. If you pick a short-term debt fund, you might pay very little exit load. But for long-term debt funds, you could face an exit load if you take your money out too soon.
3. Liquid Funds: You don’t often see exit loads with liquid funds. These funds are designed for quick in-and-out investments, making them easy to liquidate. But watch out some liquid funds might charge you a small fee if you pull your money out in just a few days.
4. Hybrid Funds: Hybrid funds put money into both stocks and bonds. Their exit fee setup often depends on how they split their investments. These funds follow the exit fee rules of whichever type of investment they hold more of.

How to Avoid Exit Load in Mutual Funds?

Exit loads are part of investing in mutual funds, but you can steer clear of them or keep them to a minimum:

1. Keep Your Money in for a While: The easiest way to dodge exit fees is to leave your money in the fund past the exit fee period, which is a year for stock funds. This matches the fund’s goal of long-term investing and helps you avoid extra costs.
2. Think About How Long You Want to Invest: Before you put your money in, think hard about how long you want to invest and when you might need your cash. If you think you’ll need the money soon, pick funds that don’t have exit fees or have a shorter exit fee time.
3. Choose Funds Without Exit Fees: Some mutual funds that you can cash out offer high liquidity without any exit fees. If these funds fit what you want to do with your money, they can be a good way to avoid paying exit charges.
4. Partial Redemption: If you need to cash out some of your investment but want to keep exit load charges low, think about redeeming just a part of your units. This approach lets you keep most of your investment untouched and helps you avoid or cut down on exit load fees.

Conclusion

Exit load in mutual funds plays a key role for investors to consider. Though it might look like an extra expense, it has an important function in keeping mutual funds stable and sound. When you grasp what exit load means how it operates, and how to figure it out, you can choose your investments more wisely.

No matter, if you’re an old hand at investing or just getting started, knowing about the exit load in mutual funds will make your overall investment plan better and help you get the most from your mutual fund investments.