1. What Is an Exit Load?
An exit load refers to the fee that the Asset Management Companies (AMC) charge the investor at the time of exiting or redeeming a scheme. Sometimes it also applies to the commission to the fund house or pre-exit penalty, if the investor exits the fund before the lock-in period is over. Not all funds levy an exit charge. Hence, while choosing a plan, do consider the exit load too, along with its expense ratio. Yes, the exit fee is not part of your expense ratio.
In case of open-ended funds, the investors have the choice to exit the investment plan as per their choice. Many a time, investors fail to honour the specified period for which they had agreed to invest in a fund. So, an exit load can discourage the investors from pulling out their investments from mutual fund schemes prematurely. This fee may also reduce the number of withdrawals from the mutual fund schemes.
2. What Are Exit Load in Mutual Funds?
The exit fee is usually a percentage of the Net Asset Value (NAV) of the mutual fund held by investors. Once the AMC deducts the exit load from the total Net Asset Value, 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, this would be much before the agreed investment period. So, here it is like an early-exit penalty. 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. And if the investor completes the agreed fund tenure, then he/she needn’t pay the exit load at the time of redemption.
3. How to Calculate Exit Load in Mutual Funds?
The exit load is, most often, at the discretion of the fund manager. Suppose, an investor has invested Rs.10,000 in a mutual fund scheme in January 2017. The NAV of the scheme is Rs.100 and the exit fee for redeeming before one year is 1%. In March 2017, 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 2017, when the NAV is Rs.110? How can you know the exit fee, if the redemption happens in February 2018, 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 2017, the exit load would be charged for both investments in January 2017 and March 2017 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 2018, the first investment of January 2017 passes the one year term. Hence, there is no exit load for its redemption. However, the second investment of March 2017 will attract payment of exit charge at 1% as specified in the above table.
Thus, being aware of exit fees is essential for an investor. It helps you gauge your returns after all expenses. You can also invest with ClearTax Invest for hand-picked funds after doing all the research. Start investing.