Exit load is one of the factors investors should be aware about before selecting a mutual fund scheme. Mutual fund houses need the help of financial experts to manage funds and generate returns. This service comes at a certain fee and is referred to as 'load'. If an investor decides to redeem or sell their mutual fund units, the mutual fund company may levy an exit load.
Like a savvy investor, Mr Rajeev thoroughly compared the past returns, risk factors, and expense ratios of various mutual fund schemes before investing. However, like most new investors, he didn’t consider the exit load.

Now, while redeeming, he might be in for a surprise when the AMC (Asset Management Company) deducts a certain percentage from the redeemable amount.

But what is the exit load in a mutual fund? Here’s everything you should know-

Exit load Meaning

An exit load is a fee charged by Asset Management Companies (AMCs) if an investor makes a partial or full redemption within a specified period from the date of investment. The time period varies according to the type of fund. Exit load is often referred to as fund house commission or exit penalty for investors who’d like to redeem their mutual fund investment before the lock-in period if it applies to the chosen scheme.

However, not every scheme has an exit load. As a result, investors need to check the exit load of the scheme before investing, as it’ll directly impact the returns they generate from their investment. The purpose of the exit load is to discourage investors from making hasty or frequent withdrawals. Exit load can reduce frequent or short-term withdrawals from the mutual fund scheme.

What is the Exit Load in Mutual Funds?

An exit load is a specified percentage of the NAV in Mutual Fund units that an investor has. Once the exit load is deducted from the total NAV, the investor’s account gets credited with the remaining amount. In mutual funds, the exit load is a fee charged on its current NAV (Net Asset Value) at the time of redemption. As the exit load varies between mutual fund categories, SEBI has made it mandatory for every scheme to disclose its exit load in the offer documents.

While redeeming the fund, the AMC deducts the applicable exit load from the redeemable amount and credits the rest into the investor's bank account.

How to Calculate Exit Load in Mutual Funds?

Let's take Rajeev's example to understand better exit load meaning and how it is calculated. He invested Rs. 1 lakh in XYZ mutual fund, which has a lock-in of 1 year and exit load of 2%. The NAV during the purchase of the scheme units was Rs. 90, and he received 1,111 units.

After 6 months, he redeems the investment at Rs 100 per unit NAV. As he is redeeming the investment before the lock-in, he'll have to pay the exit load at 2%.

So, if the NAV of the scheme is Rs. 100 while redeeming his fund, the exit load will be Rs. 2 (2% of Rs. 100). As a result, he will receive Rs. 98 (Rs. 100 - Rs. 2) for each unit he redeems. Here's how to calculate the exit load in this scenario-

Now, if he had remained invested for more than 1 year, he wouldn't have had to pay the exit load. If we consider a scenario where the scheme's NAV remained at Rs. 100 after 1 year, he'd have received Rs. 111,100.

What is the Exit Load on Different Types of Mutual Funds?

The exit loads vary between mutual funds. However, not every scheme charges an exit load. In most cases, the exit load is at the discretion of fund managers. You can find an online mutual fund exit load calculator to calculate the exit load for various schemes.

But to give you an idea, here’s what the exit load can be for different fund categories-

How is Exit Load Calculated for SIPs?

Several investors take the SIP (Systematic Investment Plan) route to invest in mutual funds. For calculating the exit load on these, every SIP is treated as a new investment. So, the exit load will depend on when the investment was made and when you redeem the investment.

For instance, let’s assume you start a SIP of Rs. 10,000 per month in a scheme with a lock-in of 1 year and exit load of 2% on 1st January 2022.

If you redeem the investment on 10th January 2023, the first SIP invested on 1st January 2022 will not attract an exit load as the investment has completed the lock-in of 1 year. However, exit load will be applicable on the remaining SIPs as the investment is yet to complete the lock-in period.

Consider Exit Load Before Investing in Mutual Funds

As the exit load directly impacts the returns you generate from your mutual fund investments, it is one of the most vital considerations. Go through the scheme’s offer document and compare the exit loads of the schemes you’re interested in before making a decision. You can also use an online exit load calculator to check the approximate exit load and make informed decisions.
Also, if the scheme has a duration-based exit load, try to remain invested throughout the tenure to avoid paying the exit load.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.