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A mutual fund is a pool of investments drawn from various individual and institutional investors. Mutual funds require a team of financial experts to manage and generate returns. So, it is but evident that the service comes at a fee. This fee also goes by the name ‘load’. Some AMCs charge exit load on exiting or redeeming units of a fund.
An exit load refers to the fee that the Asset Management Companies (AMCs) charge investors at the time of exiting or redeeming their fund units. It is also referred to as the commission to fund houses or exit penalty if an investor exits the fund in the lock-in period. Not all funds levy an exit charge. Hence, while choosing a plan, do consider the exit load too, along with its expense ratio. You need to note that the exit load is not part of the expense ratio. In case of open-ended funds, the investors have the choice to exit the scheme as and when they want. Sometimes, investors fail to stay invested for the specified period for which they had agreed to invest in a fund. Hence, an exit load discourages investors from prematurely exiting the fund. This fee may also reduce the number of withdrawals from the mutual fund schemes.
The exit fee is usually a percentage of the Net Asset Value (NAV) of the mutual fund units held by investors. Once the AMC deducts the exit load from the total NAV, the remaining amount gets credited to the investor’s account. For instance, if the exit charge for a one-year scheme is 2% and you redeem within six months, then this would be much before the agreed investment period. If the NAV of the fund is Rs.35 during the time of redemption, then the exit fee would be 2% of Rs.35, which amounts to Rs.0.7. The remaining amount, Rs.34.30 gets credited to the investor. If the investor completes the agreed fund tenure, then he/she will not be charged the exit load at the time of redemption.
The exit load is, most often, at the discretion of the fund manager. Suppose, an investor invested Rs.10,000 in a mutual fund scheme in January 2018. The NAV of the scheme is Rs.100 and the exit fee for redeeming before one year is 1%. In March 2018, the investor would opt to invest Rs.6,000 at NAV of Rs.100 in the same fund. How will you calculate the exit fee, if he redeems the fund in November 2018, when the NAV is Rs.110? How can you know the exit fee, if the redemption happens in February 2019, when the NAV is Rs.115? It is quite simple, and as shown below:
|Number of Units bought in January 2017||Rs. 10,000/100 = 100 (Total NAV/Number of Units bought)|
|Number of units bought in March 2017||Rs. 6000/100 = 60|
For redemption in November 2018, the exit load would be charged for both investments in January 2018 and March 2018 as per the prevailing NAV of Rs.110 in November.
|Exit Load||1% of [(100 x 110) + (60 x 110)] = Rs 176.|
|The amount credited to the investor||17600 – 176 = 17424 (Total NAV – Exit fee)|
|For the second investment of March 2017||1% of (60 X 115) = Rs. 69|
In case of redemption in February 2019, the first investment of January 2018 passes the one-year term. Hence, there is no exit load for its redemption. However, the second investment of March 2018 will attract payment of exit charge at 1% as specified in the above table.
Thus, being aware of exit fees is essential for investors. It helps in gauging returns after all expenses are met. Also, you can invest with ClearTax Invest for hand-picked funds after doing all the research. Start investing!