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Exit Load in Mutual Funds: An Overview

When you get into investing, people will always warn you to be wary of any “hidden fees” that might be associated with your investments – and the exit load can be categorized as one such fee.

But, we say – why should anything be hidden at all?

Today, we thought we’d talk about the exit load, and help you understand it a bit better so you’re not caught off guard when investing. Let’s see if we can do this question by question.

What is the exit load in mutual funds?

An exit load refers to the cost incurred when you are trying to withdraw from a fund before the stipulated time. Typically, an exit load is a small charge of 1-3% that will be deducted from your total investment and interest at the time of retrieving your capital. Keep in mind that you are often liable to incur an exit load in SIP mutual fund investments, and you need to know about such charges beforehand for accurate financial planning.

Here’s how the exit load is calculated – 

Assumptions

Formula

Calculation

  • 2% exit load
  • Investment of ₹5,000
  • 50 units bought at ₹100 NAV 
  • 1-year scheme
  • Withdrawal at 3 months
  • NAV at the time of exit is ₹90

Exit Load % 

Number of Units Purchased 

x

NAV (at time of exit)

For our assumptions the exit load is calculated as – 

 

2% x 50 x 90 = 90

So, 90 is the exit load here, which will be deducted from the investment if it is withdrawn at the 3 month mark.

On a micro level, the main reason why an exit load is applied has to do with discouraging premature withdrawals by investors before their investment lock-in period is actualized. However, on a macro level, an exit load also reduces the overall withdrawals from mutual fund schemes in India.  

What are the features of exit load in mutual funds?

In addition to the micro and macro benefits we just mentioned, there are certain features that make an exit load an important aspect of mutual fund investing to understand. Here are some of its most prominent features – 

  1. Varied Time Frames – Exit loads can have different time frames, ranging from a few days to several years, depending on the specific investment product or fund. Some mutual funds may have tiered exit loads, wherein as your investment period increases, your exit load fee reduces. For instance, if the investment horizon increases from 1 year to 3 years, the exit load might reduce from 2% to 1%.

     

  2. Aligns with Objectives – Various funds have different investment objectives. Exit loads are often aligned with these investment objectives For example, equity funds with a focus on long-term capital appreciation may have longer exit load periods, while debt funds with shorter-term objectives may have shorter periods.

     

  3. Protective Attribute – Exit loads also protect the interests of long-term investors (so… you!) by discouraging frequent trading activity, which can disrupt the fund’s management and increase transaction costs. You can think of it as a feature that protects investors like you from opting out too early, and instead giving your money the time to grow.

     

  4. Fund-Specificity – Exit loads are not uniform and can vary from one investment product or fund to another. Different funds within the same fund management company may have distinct exit load structures. This is why it is important to find out about exit loads before investing, especially when you are diversifying your portfolio and venturing into newer investment options or asset classes.

     

  5. Impacts of Returns – Where your interest is an earning on your investments, the exit load is an expense. So, incurring an exit load has a direct impact on your total earning potential. Exit loads reduce your overall returns, particularly if you redeem your investment units shortly after purchasing them. It’s important for you to always be aware of these charges and consider them when making investment decisions.

These general features of the exit load are important to keep in mind regardless of your investment choice. Always remember that the exit load has a clear impact on your expense ratio of investing – so it becomes an important aspect for you to track!

Now, while we’ve had a lot of Deciml users asking us about the exit load (hence this blog!), we’ve also had a few reach out to us and ask us about whether the exit load varies between open-ended and close-ended mutual funds. Which brings us to the last section of this blog!

What’s the difference between open-ended and close-ended mutual funds?

There are certain key differences between open-ended and close-ended mutual funds, as shown below – 

Basis of Comparison 

Open-Ended Mutual Funds

Close-Ended Mutual Funds

Definition

These are continuous investment options, i.e., you can invest in open-ended mutual funds all year round.

These funds are only available for purchase for limited windows of time, i.e., you can only invest in close-ended mutual funds on particular days.

Mode of Investment

You can opt for SIP or lump sum investing.

You can only avail the lump sum investing option.

Maturity

There is no fixed maturity period; though there might be lock-in periods.

Usually, the maturity period is 3 to 5 years.

*A lock-in period is the time during which you are not allowed to redeem your investment. The maturity period is the time at which your principal investment amount and interest are ready to withdraw (or reinvest!). You shouldn’t withdraw your investment before its maturity, even if the lock-in period is up!

Exit Load

Open-ended funds may impose exit loads. This means that not all mutual funds will have exit loads; you might find options where no fee is levied.

Close-ended funds often have a structured exit load. This means that all close-ended mutual funds have an exit load fee in place.

With respect to the exit load for open and close-ended mutual funds, it is important to note that – 

  1. Exit loads in open-ended mutual funds are typically less stringent, as they are aimed at discouraging pre-emptive withdrawals above anything else. So, you might have some wiggle-room, but – yes, this bears repeating! – not all open-ended mutual funds will be exempt from an exit load. Open-ended mutual funds are categorized as relatively liquid, in spite of the exit load.

     

  2. Exit loads in close-ended mutual funds are the fees imposed on those investors who redeem their investment before their maturity date; though it usually reduces the closer you get to the date of maturity for your selected investment option. Close-ended mutual funds are not considered highly liquid, as their lock-in period is a mandatory investment term for the investor.

So, to clearly answer our users, here’s what we’ll say – open-ended and close-ended mutual funds both can have exit loads associated with them, though the severity of these fees can vary depending on your chosen fund. 

This means that whatever kind of mutual fund investment you are opting for, we always recommend considering the exit load before investing!

FAQs

  • What is the meaning of exit loads?

An exit load refers to the cost incurred when you are trying to withdraw from a fund. 

  • How is exit load calculated?

Exit Load % x Number of Units Purchased x NAV (at time of exit)

  • How does exit load help the investor?

Even though an exit load is a cost incurred, it offers investors protection against premature withdrawals, ensuring that they are staying invested for longer terms.

  • What are open-ended mutual funds?

These are mutual fund schemes that offer continuous investment options to investors.

  • What are close-ended mutual funds?

These mutual fund units are only made available to investors for a limited window of time.

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