Exit Load in Mutual Funds: Meaning, Types and Calculation

Exit loads in mutual funds are charges applied when you redeem your investment before a specified period, but the calculation differs for lump sum and SIP investments. While lump sum redemptions attract an exit load on all units, in SIPs, it applies only to units that do not meet the exit load criteria. This distinction ensures fair treatment for long-term investors. 

In this guide, we will explain the meaning, types, calculation, and purpose of exit loads in mutual funds.

Key Highlights

• Exit load varies based on the fund composition.
• You can avoid paying the exit load if you redeem after the exit load period.
• Exit load calculation for lump sum and SIP is significantly different.

What Does Exit Load Mean in Mutual Funds?

Mutual fund companies levy a fee called an exit load when investors redeem their units before a specified holding period. This fee is calculated as a percentage of the redemption amount and is designed to discourage short-term trading and protect long-term investors. 

For example, if the redemption value of your investment is ₹10,000 and the applicable exit load is 1%, the fee charged would be ₹10,000 × 1%, which equals ₹100. The remaining ₹9,900 would be credited to your account. In addition, exit loads vary across schemes and are disclosed in the fund’s offer document.

Types of MF Exit Load

1. Contingent Deferred Sales Charge

This type of exit load decreases over time as you hold your mutual fund for a longer duration. The longer you hold your mutual fund, the lower the exit load you pay. If you hold your mutual fund for the entire tenure, you might not have to pay any exit load. 

1. Fixed Exit Load

A fixed exit load remains constant for the entire tenure of your mutual fund. For instance, you may have to pay a 1% exit load if you redeem within 1 year or at the end of the tenure.

Exit Load Calculation in Mutual Funds: Lump Sum and SIP

The calculation of exit load for lump sum investment and SIP (Systematic Investment Plan) varies. Let us consider the following examples to understand the calculation:

Scenario 1: Exit Load Calculation on Lump Sum

Suppose Mr X invested ₹1,00,000 in a lump sum mutual fund to purchase 1,000 units. The applicable exit load is 1% if redeemed before 1 year. Mr X plans to redeem the investment after 4 months. 

NAV (Net Asset Value) at the time of redemption = ₹110

Redemption amount = ₹110 * 1,000 units = ₹1,10,000

Exit Load = ₹1,10,000 * 1% = ₹1,100

Final Amount that Mr X receives = ₹1,10,000 - ₹1,100 = ₹1,08,900

Scenario 2: Exit Load Calculation on SIP

Suppose Mr. Y invests ₹100 every month in SIP from August 2024. An exit load of 1% applies if he redeems the funds before 6 months. Mr. Y plans to redeem in March 2025. NAV at the time of redemption is ₹105. Let us consider the following example to understand the calculation:

1 unit invested before September 2024 will not attract any exit load.

9 units invested within 6 months will attract an exit load of 1%.

Exit Load = ₹105 * 9 units * 1% = ₹9.45

Total amount that Mr Y receives = (₹105 * 10 units) - ₹9.45 = ₹1,040.55

Purpose of Exit Load in Mutual Funds

1. Limit Short-Term Trading

Investors often tend to redeem their mutual fund holdings within a short term. However, this creates challenges for fund managers to maintain a portfolio strategy. To prevent short-term redemption, asset management companies levy an exit load.

1. Safeguard Long-term Investors

Short-term exit from mutual funds might adversely affect the long-term investors. Imposition of an exit load protects long-term investors, ensuring portfolio stability. 

Exit Load on Different Mutual Funds

1. Equity Mutual Funds: Usually 1% if redeemed before 12 months.
2. Debt Mutual Funds: Usually 0.5% to 1% if redeemed within 6 months to 12 months.
3. Hybrid Mutual Funds: Based on equity or debt composition; if equity composition is higher, the exit load of equity funds apply.
4. Thematic Funds: Can have higher exit loads, up to 2%, depending on the fund’s terms.
5. Liquid Funds: Usually, no exit load is charged if redeemed after 7 days. Some funds charge 0.01%–0.05% if redeemed within 7 days.
6. Overnight Funds and Ultra Short Term Funds: Usually, no exit load applies.

Strategies to Avoid Exit Load in Mutual Funds

• Redeem your holdings beyond the exit load period.
• You can redeem older SIP units first after the exit load tenure.
• Invest in funds with no exit load.
• Track your investments at regular intervals to check the exit load period.

Exit load on mutual funds varies based on the fund type and composition. Further, it is calculated based on the NAV on the redemption date and the number of units redeemed.

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