What is Exit Load in Mutual Funds?
An Exit Load is the fee charged by Mutual Funds if an investor wishes to withdraw his investment in Mutual Fund within a specified period from that fund. This charge is calculated as a percentage of the NAV and not on the amount you invest. Time period for calculation of exit load is for every purchase or investment. Many mutual fund schemes which do not charge an exit load.
Does exit Load apply for SIP also?
The same rules govern the Systematic Investment Plan (SIP) model. In SIP, each instalment is taken as a new investment and, hence, you will be charged an exit load for it if you sell each instalment within the predefined time.
Why are Exit Load charged?
They act as a deterrent to quick withdrawals that could put pressure on fund managers to generate cash to meet the redemption. After the predefined period most equity funds have zero exit load.
How is Exit Load Calculated?
Exit Load is deducted from the NAV. For example, If an investor is redeems 10 units with NAV of Rs 10 and the exit load specified is 1% if sold within an year. Then if he sells within the year selling price per unit will be Rs 9.9. It means that the amount of money that he will get is Rs 9.9 X 10 units or Rs 99.
Let’s see with another example. Assume you invest
Rs. 10,000 on the 1st of January 2014 in a mutual fund with NAV of Rs 100 that
charges an exit load of 1% for redemption within 1 year. In March you invest
Rs. 5250 at NAV of Rs 105 more in the same fund. How much would the exit load
be if you opt to redeem in November 2014 when it’s NAV is Rs 110? How much
would the exit load be if you opt to redeem in February 2015 when it’s NAV is
Rs 112?
·
Number of units you
bought in Jan 2014 are : Rs 10,000/100 = 100
·
Number of units you
bought in Mar 2014 are : Rs 5250/105 = 50
If you redeem in Nov 2014 you would may exit load for both the investments i,e for one in : In Nov when NAV is 110, you would pay 1% of (100 * 110 + 50 * 110) = Rs. 165. You’ll get back Rs. 16335(minus STT of 0.001% if this is an equity fund)
If you opt to redeem in February of 2015? Since the first investment is past the 1 year mark. So you’ll pay not pay exit load for it. Exit load is to be paid for second investment only i.e 1% of 50 * 112 = Rs. 56. (And you’ll still pay STT on the whole amount, for equity funds).
Does every Mutual Fund have same exit load?
These loads (entry/exit) vary from scheme to scheme, but have to be within the limit prescribed by the market regulator, the Securities and Exchange Board of India (Sebi).
Is Exit Load different from Expense Ratio?
Mutual Fund companies charge investors for professional fund management and regular operational costs. It is an annual charge as percentage of the net assets of the fund and is called as Expense ratio or total expense ratio (TER). Expense ratio includes investment management and advisory fees, sales or agent commissions and service fees, legal and audit fees, registrar and transfer agent fees, fund administration expenses, and marketing and selling expenses. This is the AMC’s main source of income; it pays its fund manager’s salaries out of this portion. So yes Exit Load is different from Expense Ratio.
Equity
funds can charge a maximum of about 3% of the net assets. Debt funds can charge
a maximum of 2.75% of the net assets. Usually as the size of the mutual fund
grows costs tend to go down. Earlier, AMC used to get a maximum of 1.25%. But
in 2012, Sebi allowed fungibility of costs i.e of the 3% charge it gets to
spend this money in any which way it wants.
Are there any other charges charged by Mutual Funds?
Entry load: It is a front-end charge deducted from the NAV at the time of investing in a mutual fund scheme. SEBI abolished entry loads in August 2009. These charges were around 2.25% for equity funds before abolition.
Transaction charge: Starting August 2011, SEBI has allowed Mutual Funds to collect a nominal amount as a one-time transaction fee. For the first time investor, Mutual Funds can collect Rs 150 as a fee if the investment is more than Rs 10,000 while the fee for an existing investor would be Rs. 100. For any amount less than Rs. 10,000 no fee will be charged. In the case of Systematic Investment Plans (SIPs), where the total commitment towards the SIP is more than Rs. Rs 10,000, a transaction charge of Rs. 100 will be levied payable in four equal instalments starting from the second to the fifth instalment.
Why should one worry about Exit Load?
When you sell or redeem your Mutual Funds within the time frame for which exit load is defined you will have to pay Exit Load. Hence you will get less amount back in your hands. It might seem small but if you are getting 1 lakh after redemption then exit load of 1% will take away 1000 Rs.
How does one find about these charges?
Information about these charges for mutual funds are easily available. I check the Fees & Detail section on Value researchonline.
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