Why Consider the Exit Load While You Redeem Your Mutual Funds?
Jun 28, 2019

Author: Aditi Murkute

(Image source: Image by Deedster from Pixabay )

Imagine this, you finally start investing in a mutual fund that your friend recommends after a brief analysis. Several months later, you read a news headline about a debt-ridden company has defaulted on its payment. Later, when you track your fund balance, it has dipped and delving deeper you see the exposure of your fund to this sinking company.

[Read: Can You Ignore Default And Liquidity Risk While Investing In Debt Mutual Funds?]

Immediately, you decide to redeem your units. But then the fund house reminds you about the "Exit load", which prevents you from exiting. And you are stressed out till the exit load imposed tenure ends.

If you are faced with such a situation, you would want to know what went wrong with your investment plan.

I would like to point out some avoidable mistakes (in this case):

  • x Took guidance from a friend.

  • x Didn't invest as per your goals, without a proper financial plan and risk profile done.

  • x Didn't do your own research so you missed crucial details like the portfolio characteristics and exit load.

  • x Gave in to your emotions and did not think for the long term.

I would like to reiterate that investments are an individualistic exercise. You should invest only after...

Setting your financial goals (short term and long term);

Getting your risk profile assessed;

Assessing your financial position;

Based on the above three points, create an investment strategy;

Choose the appropriate investment avenue accordingly;

Consider qualitative & quantitative parameters of a fund;

And read the scheme related documents (SID, factsheets) carefully.

In this article I will explain one of the most overlooked aspects of a mutual fund, i.e. Exit load.

I have observed that most investors haven't grasped the concept of exit load when they begin to invest in any scheme.

Exit load in brief...

It is a penalty deducted by a fund house when you as an investor redeems/exits a scheme or makes a switch to another fund within a stipulated period from the time of purchase of units. It is imposed to prevent investors, withdrawing from the scheme prematurely. It is set in place for the investors' welfare.

Different mutual funds charge different fees. It is usually charged as a percentage of the prevailing net asset value of the scheme when the investor redeems their units. The rate of exit load is mentioned in the scheme information document of the mutual fund.

For equity funds, the fee is generally 1% of the total amount withdrawn (within a year of investing). Generally, units held for more than a year don't attract an exit load, however there are exceptions. Debt funds, liquid funds, and short-term debt funds usually don't have any exit load. However dynamic bond funds, long duration debt funds, and other types of debt funds might charge some exit load if you withdraw between six months to a year.

Be careful to check these before redeeming your funds. In case the investor retains the investment until the end of the stipulated period, no exit load will be charged.

How should you Calculate Exit Load?

Suppose, you are selling 500 units of an equity scheme, you had purchased four months ago. The scheme levies an assumed exit load of 1 per cent because you are redeeming the units before one year. If the NAV is Rs 1000. You will get Rs 990 per unit [Rs 1000 - Rs 10 (1% of 1000)] on redemption. The total amount which you receive will be Rs 4,95,000 (Rs 990 X 500 units). That means you have paid an exit load of Rs 5000 (Rs 1 per unit).

In case of regular investments via SIP instalment, the individual holding period is taken into consideration while calculating the exit load. For SIP, the AMCs charge the exit load using the "first-in-first-out (FIFO)" approach.

Consider this, you start a monthly SIP of Rs 2000 with a NAV of Rs 10 at the beginning of 2018 for a period of three years. However due to some reason you decide to redeem units today (in the month of June 2019) to exit from the scheme at NAV of Rs 25. Given in the table below shows the exit load charged and how it is calculated if you have invested through SIP.

Table: Number of units purchased via SIP

Month SIP instalment (Rs) NAV (Rs) No of Units purchased
1-Jan-18 2000 10 200
1-Feb-18 2000 9 222
1-Mar-18 2000 12 167
1-Apr-18 2000 13 154
1-May-18 2000 15 133
1-Jun-18 2000 11 182
1-Jul-18 2000 15 133
1-Aug-18 2000 20 100
1-Sep-18 2000 16 125
1-Oct-18 2000 18 111
1-Nov-18 2000 22 91
1-Dec-18 2000 25 80
1-Jan-19 2000 23 87
1-Feb-19 2000 21 95
1-Mar-19 2000 20 100
1-Apr-19 2000 24 83
1-May-19 2000 26 77
1-Jun-19 2000 27 74
(Illustration purpose only)

Since the number of units which are more than one year old will be 1058 (purchased in January 2018 to June 2019), on these units the exit load would not be applicable.

The redemption amount for these units is: (number of units which are more than one year old (1058) * NAV (25)) = Rs 26450

However, for the remaining units that is 1157 (purchased in July 2018 to June 2019), the scheme levies an exit load of 1 per cent as the units are withdrawn before a year.

So according to this, the exit load commission you must pay will be:

Exit Load = Rs 25 NAV * 1% (Exit load of One per cent of NAV at redemption) * 1157 units (Units redeemed in less than 1 year) = Rs 24.75.

And the redemption amount for these units is (total number of units which are less than one year old (1157) * exit load (24.75)) = Rs 28635.75

Hence the final redemption amount you will receive - Rs 55085.75

Most times you might exit from the mutual fund or switch from the scheme for the following reasons:

  • You have achieved your desired corpus for a financial goal.

  • The underperformance of a scheme.

  • The fund objective changes.

  • The fund risk profile changes.

  • In case of a financial emergency.

So, it is important to avoid redeeming from the fund prematurely unless it is absolutely necessary. However, some fund houses have increased the exit loads, and some have abolished the exit loads for certain switches. Hence, it would be wise to always read the Scheme information details and fund factsheet to know the exit load charged by the scheme.

Unlike close-ended schemes, open-ended schemes can be redeemed anytime; but solutions-oriented funds and ELSS have a stipulated lock-in period. So be mindful and choose the right fund that suits your financial plan, goals, and needs.

PS:  If you are looking for funds to invest that can create wealth for you but aren't sure of them.

Consider PersonalFN's flagship Unbiased Mutual Fund Research service- Fundselect.

It is a credible research service that provides insightful guidance  and recommendations on equity funds and debt schemes.

Currently, we are offering this through our Special Pre-Anniversary Offer, only for our esteemed readers like yourself.

 

So, Hurry & Subscribe Now to invest in some of the most reliable schemes available for your long-term wealth creation.



Add Comments