Exit load is the fee charged when withdrawing (redeeming) money from a mutual fund before a specified period.
When an investor invests in a mutual fund, they assume they can withdraw the money whenever needed. However, while doing so, some schemes involve an additional charge, known as 'exit load'. This charge is levied when an investor redeems their investment before the stipulated time frame. This time frame varies depending on the fund scheme, such as 6 months, 1 year, or more.
What is Exit Load?
Exit load is a kind of penalty charge that the fund house imposes when an investor withdraws money early. Mutual fund companies want investors to stay in the fund for the long term so that fund managers can invest money with better planning. But when an investor withdraws money prematurely, the fund manager has to suddenly raise cash, which affects the fund's management. In such a situation, they compensate for this inconvenience through the exit load.
Understanding the Impact of Exit Load with an Example
Suppose you have invested ₹1 lakh in a fund, and the condition is to keep the money invested for 12 months. If you withdraw the money after 8 months and the exit load in that scheme is 1 percent, you will only get ₹99,000 back after a deduction of ₹1,000. On the other hand, if you complete 12 months, you will get the full amount without any deduction. This depends on the terms and conditions of the fund.
Not all Funds Necessarily Have Exit Load
It is not necessary that every mutual fund has an exit load. Many schemes do not have any exit load at all, especially in some debt funds and long-term equity funds. Some funds, however, impose an exit load for the first year and not afterwards. Therefore, before investing, one should carefully read the fund documents to avoid any problems later.
What is the Purpose of Exit Load?
Fund houses view exit load not only as a charge but also as a disciplinary system. Its main objective is to prevent investors from withdrawing money hastily. Many times, investors get panicked when the market declines and withdraw their money. The presence of an exit load helps them make informed decisions.
Helping Maintain Fund Stability
When many investors suddenly withdraw money, the fund has to sell its portfolio holdings, which can harm the other investors in the fund. Through exit load, fund houses discourage those investors who frequently invest and withdraw money. This maintains the stability of the fund and makes it easier for the manager to work on long-term strategies.
How Much Can the Exit Load Amount to?
This charge can usually range from 0.25 percent to 2 percent. In some specific schemes, like ultra-short-term funds, it is very low or negligible. In equity funds, it may be a little higher, especially if the scheme is based on active management.
Important Information for New Investors
It is very important for new investors to have information about the exit load. It is often seen that people invest without reading and are surprised to see the deduction when withdrawing money when needed. Therefore, before investing, one should definitely look at the information related to the exit load in the fund documents.
