Mutual Fund Unlocked: Exit load on mutual funds explained

Asset management companies collect an amount from investors when they exit a scheme. Generally, this fee charged is termed as an 'exit load'. Exit load is an amount charged to an investor for leaving or exiting a scheme, if they do so before a certain period. Primarily, exit loads are levied to discourage premature withdrawals by investors.

Different mutual fund schemes charge different exit loads (generally 1 per cent, if they exit before 365 days) and also have different periods in which they levy it. The information regarding the exit load is stated in the scheme information document or SID. Exit load is typically charged as a per cent of the Net Asset Value (NAV) at the time when investor sell his units before the stipulated time.

Calculation of Exit load

To understand the calculation of exit load lets take an example, Suppose Mr. A has invested Rs. 1,00,000 in a equity scheme with a NAV of Rs. 100 six months ago, later in the seventh month he sold 500 units out of it. The scheme charges 1 per cent exit load. So after redemption Mr. A will receive Rs. 99/unit that is he will pay Rs. 500 as an exit load.

Case of SIP

Most of the investors are unable to understand the concept of exit load correctly when they invest by a way of SIP. The common belief of the investors is that if they have started an SIP a year ago then there would be no exit load if they sell the investment after the stipulated time. However, this is a wrong perception.

In the case of SIP holding period is applicable for every installment of the SIP. Lets look it with the example, assume that Mr. A has invested via an SIP in a mutual fund scheme from January to July, 2016. And sold the scheme on March 31, 2017 at an NAV of Rs. 110. The scheme levies an exit load of 1 per cent if the units are withdrawn before a year. How much exit load Mr. A has to pay? See the table below

Here, the number of units which are more than one year old will be 301 (purchased in January to March 2016) on these units the exit load would not be applicable. However, remaining units which are less than one year old that is 400 (purchased in April to June 2016), exit load will be charged.

So according to this the exit load payable by Mr. A will be

Exit Load = Rs 110 NAV * 1% (Exit load of One per cent of NAV at redemption) * 400 units (Units redeemed in less than 1 year) = Rs.440

This Rs. 440 will be reduced from its final amount of redemption which will be received by Mr. A on March 31 2017. In the same way, the calculation is done for exit loads, before 2012, AMC’s are allowed to use the amount collected as exit load for sales and marketing activities. But due to this many existing investors also hampered so to protect the interest of the investors, the market regulator SEBI has ordered that exit load should go back to the respective schemes.