Exit Load in Mutual Funds: What You Need to Know  

Have you ever had to take a sudden withdrawal from a mutual fund just to find out that your returns have been affected by an unexpected charge? The fee mutual funds charge for early withdrawals is known as the exit load. For example, if you withdraw ₹50,000 from a fund with a 1% exit load within three months, you would incur a penalty of ₹500. 

Understanding exit loads can save you thousands of rupees, regardless of your investment timeline. So, let’s breakdown what exactly exit load in mutual funds means, how it is calculated, fund-specific rules, and some smart strategies that you can implement. 

What Is Exit Load in Mutual Funds? 

An exit load is basically a fee that mutual funds impose on investors who sell their units before a predetermined time frame in order to deter short-term trading and safeguard long-term investors. 

The price that asset management companies (AMCs) charge you when you withdraw or exit your fund units is known as an exit load. To keep you from backing out and withdrawing your assets before the lock-in period is over, exit loads are imposed.  

Besides this, the exit load fee can also help reduce the number of withdrawals from the mutual fund schemes. However not every fund charges investors an exit fee. Therefore, while selecting an investment plan, you need to consider the “exit load” aspect. In the context of mutual funds, exit load is defined as a percentage of the investor’s mutual fund’s net asset value (NAV). An entity’s net asset value is determined by subtracting the value of its liabilities from its assets. 

Exit Loads on Various Types of Mutual Funds 

The exit load rates for different mutual funds vary. But not all mutual funds need you to pay an exit load. It would be beneficial to examine the exit burden of the mutual fund schemes you are considering investing in. Let’s examine some mutual fund rates. 

• Debt mutual funds may or may not charge an exit load, which is a fee you pay if you redeem your investment before a specified period. However, you can avoid paying this fee by simply staying invested beyond the exit load period. 

• It is the same for equity-linked funds. It comes up to around 1% if it is redeemed within the first 3,6 or 12 months depending on the terms and conditions mentioned in the offer document. 

• It is often observed that there is no entry or exit load on liquid funds. This means that you can redeem the investments whenever you wish, and the money gets credited to your bank account on the same or very next day. 

When Is Exit Load Applicable? 

When you redeem or sell your mutual fund units within the specified lock-in or holding period, typically ranging from seven days to one year, and in some cases up to three years depending on the fund type, you may be charged an exit load. 

If units are sold within seven days to a year, most equity funds levy an exit load of 0.5–1%. For example, it would cost ₹1,000 (1% fee) to redeem ₹1 lakh within six months. Exits are often free after a year. 

For redemptions within 15 days to six months, short-term debt funds (like corporate bond funds) usually charge an exit load of 0.25–1%. The lock-in periods of ultra-short-term funds could be shorter. 

Exit loads are usually waived off for liquid funds, which makes them perfect for last-minute withdrawals. Most offer same-day or T+1 redemptions without any penalties. 

How Is Exit Load Calculated 

Firstly, you must determine the exit load percentage that the mutual fund scheme in which you are involved charges in case of early redemptions. The mutual fund’s offer document or scheme information document (SID) will have this information. Mutual fund schemes typically impose exit loads on investors who exit the fund within a year. Let’s look at an example. 

For instance, you invest in a plan that levies an exit cost of 1% for redemptions made within 365 days or one year from the purchase date. Six months following the date of purchase, you redeem 1,000 units of a scheme. The exit load percentage charged multiplied by the number of units multiplied by the NAV (assuming ₹100) will be the exit load. 

1% ✕ 1000 (number of units) ✕ 100 (NAV) = ₹1000 is the exit burden. 
This sum will be deducted when the redemption proceeds are credited to your linked bank account. 

{1000 (units) ✕ 100 (NAV)}  – ₹1000 (exit load) = ₹99,000.  
 
In this case, you will get ₹99,000 as the final redemption amount. 

Why Exit Load Matters for Investors 

Although exit loads may look like a small expense, they do influence your profits significantly, particularly if you have a limited time horizon. This is why it matters: 

• Exit loads tend to eat into your profits. A 1% exit load on a ₹5 lakh redemption will cost you ₹5,000 – enough to wipe out a substantial part of your gains . 

• Exit loads help build discipline. Exit loads discourage panic-selling, especially when the market crashes, like in March 2020 owing to Covid-19 thus forcing you to stay invested for better long-term returns. 

• Exit loads help protect the interests of long-term investors. Frequent redemptions force the fund to sell its assets quickly, which can negatively impact the NAV for remaining investors. By discouraging short-term exits, exit loads help maintain fund stability and preserve value. 

• Exit loads represent a liquidity trade-off. Funds like liquid funds, which typically have zero exit load, offer greater flexibility and easy access to money. However, this convenience often comes at the cost of relatively lower returns. 

Conclusion  

Exit loads in mutual funds might seem like a very minor, negligible cost, however, they can considerably impact your returns, especially with short-term redemptions. While they help prevent panic selling and protect long-term investors, being aware of these charges help you make more informed investment choices. Exit loads are a balanced trade-off between liquidity and returns. Plan wisely to maximize your rewards. 

FAQs 

What is exit load in mutual funds? 

Exit load is the cost imposed by mutual funds when you sell your units within a set time frame, typically between seven days to one year. It discourages short-term trading while protecting long-term investment. For example, a 1% exit load on a ₹1 lakh redemption costs ₹1,000. 

How is exit load calculated? 

Exit load = units redeemed × NAV × Exit load %. For instance, you are redeeming 500 units at ₹50 NAV with 1% exit load, 500 × 50 × 1% = ₹250 penalty. The remaining ₹24,750 is credited to your demat linked account. 

Do all mutual funds have exit load? 

No, it varies by the type of fund. Equity funds charge 0.5–1%, if they are redeemed within one year. Debt funds charge between 0.25% and 1%. Liquid funds often have zero exit load charges. ELSS have no exit load charges, but they do have a 3-year lock-in period. 

Is exit load charged even if I switch mutual funds? 

Yes, if the switch requires you to redeem your units before the end of the exit load period. For example, transferring from equity fund A to fund B within 6 months could end in a 1% cost. Some fund houses waive departure fees for interfund transfers. 

How can I avoid paying exit load? 

You can avoid paying the exit load charges if you hold the mutual fund for longer than the load period, invest in liquid funds, use a systematic transfer plan (STP) for gradual exits and check the scheme information document (SID) before you invest.