An investor, Mr Agarwal, has sold some of his mutual fund investments recently. On checking the redemption amount in his bank account, he finds out that the amount is lesser than what he expected. Where is the remaining money?
Well, there must be an exit load. Want to know how it works? Keep reading!
An exit load is a fee that an investor has to pay to the Asset Management Company (AMC) when selling the fund units. The objective of levying this fee is to prevent the investors from exiting the scheme prematurely. Therefore, the charge helps to diminish the number of withdrawals from the funds. That exit load varies from one fund house to another. It is calculated as a percentage of the total value of the investment at the time of redemption.
Also Read – https://navi.com/blog/best-index-funds/
Suppose Mr Agarwal allocated Rs. 40,000 to an equity fund in January 2021. The scheme has an exit load of 1% if units are redeemed before the completion of one year from the date of purchase.
Net Asset Value at the time of investment was Rs. 100, which denotes that the investor got 400 units.
Now, let’s say Mr Agarwal redeemed the units in May 2021. The calculation for exit load is as follows:
|Sum invested in January 2021||Rs. 40,000|
|NAV at the time of investing||Rs. 100|
|Units purchased||40,000 ÷ 100 = 400|
|NAV at the time of redemption||Rs. 90|
|Exit Fee||1% of (90 × 400) = Rs. 360|
|Redemption amount (Final)||Rs. (36,000 – 360) = Rs. 35,640|
The rates of exit load vary from fund to fund. You need to check this fee of a fund scheme before investing in it. Note down the points below:
In case you wish to get equity exposure without having to pay an exit load upon premature redemption, you may consider investing in the Navi Nifty 50 Index Fund. You can do so through platforms like Zerodha, Paytm Money, and Groww, to name a few.
Also Read – https://navi.com/blog/ter-in-mutual-funds/
Exit load on SIP works the same as that of all other funds. For example, Gita’s each SIP instalment must complete 1 year in order to ignore the exit load upon redemption. If Gita has invested in the plan for 3 years, she needs to wait for one more year, i.e. 4 years in total, to withdraw all her units without paying an exit load.
Hence, it is possible to avoid this cost by adjusting your investment duration with the time span for which the scheme charges an exit load.
An individual needs to be aware of the exit load while investing. After all, nobody would want to pay an additional fee that they did not know of beforehand at the time of redemption. Remember that you need to take into account the loads and expenses of a mutual fund scheme for calculating the estimated returns effectively.
Ans: Yes, an individual will have to pay an exit load if he/she is selling the units at a loss. This is because the exit load is charged on the total redemption amount and not on gains.
Ans: If an investor switches from one mutual fund scheme to another within the exit load period of the source fund, he/she will still have to pay the fee. This is because a switch is considered as redemption and not re-investment.
Ans: Net Asset Value or NAV signifies per unit market value for a specific mutual fund. This value keeps changing every day. The formula is given below:
NAV = (Total Assets – Total Liabilities) ÷ Total outstanding stocks
Ans: A debt fund is a type of mutual fund that makes investments in fixed income securities such as debentures, government bonds and corporate bonds, commercial papers, etc. Debt schemes are suitable for investors who wish to earn stable returns without taking too much risk.
Ans: Arbitrage funds refer to equity-based hybrid funds that leverage arbitrage opportunities in the equity market, for example, taking advantage of the price differential in the futures and spot market. SEBI regulations require these funds to invest 0-35% of the fund corpus in debt instruments and 65-100% in the equity asset class.
Before you go…
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.