Exit Load in Mutual Funds: Meaning, Types, Formula, and How to Avoid It
When you invest in a mutual fund, you may have to pay a charge if you sell your units before a specified period. This charge is known as an exit load. It can reduce the amount you receive when you redeem your mutual fund units.
Understanding how exit load works, when it applies and how it is calculated can help you avoid unexpected deductions when you withdraw your money.
What is Exit Load in Mutual Funds?
Exit load in mutual funds is a fee charged when an investor redeems or withdraws units before the specified holding period. It is generally calculated as a percentage of the redemption value of the units being sold.
The applicable exit load and holding period vary across mutual fund schemes.
How Does Exit Load Work in Mutual Funds?
Exit load is deducted when an investor redeems units during the period for which the scheme specifies an exit load. The charge reduces the amount payable to the investor.
- Redemption Before Specified Period: Exit load may apply when units are sold before the applicable period.
- Redemption After Specified Period: No exit load is generally charged once the specified period has been completed, subject to the scheme’s terms.
- Scheme-specific Charge: The applicable percentage and period depend on the mutual fund scheme.
Exit Load Period in Mutual Funds
The exit load period is the time during which an investor may have to pay a charge for redeeming mutual fund units. This period is not the same for every scheme and can vary based on the fund type and scheme terms.
For example, some equity mutual funds may charge an exit load if units are redeemed within one year, while certain liquid funds may have a much shorter exit load period. Investors should check the scheme documents for the applicable period before investing or redeeming.
Types of Exit Loads in Mutual Funds
Mutual fund schemes may use different exit load structures depending on their terms.
- Flat Exit Load: A fixed percentage may be charged when units are redeemed within a specified period.
- Tiered Exit Load: The charge may reduce as the holding period increases. For example, a scheme may charge a higher percentage for early redemption and a lower percentage later.
- No Exit Load: Some schemes may not charge an exit load, depending on their structure and redemption terms.
If you’re comparing mutual fund options based on costs and investment strategy, learn more about passive mutual funds and how they work before choosing a scheme.
What is Exit Load in SIP?
Exit load in SIP refers to the charge that may apply when units purchased through individual SIP instalments are redeemed before the applicable exit load period.
Each SIP instalment is treated as a separate investment, so the holding period is calculated separately for the units purchased through each instalment.
- Separate Holding Period: Each SIP installment has its own holding period for determining whether an exit load applies.
- FIFO Method: Units are generally redeemed on a First-In, First-Out basis.
- SIP Withdrawal Charges: There is no separate universal SIP withdrawal charge. Any exit load depends on the scheme’s applicable redemption terms and the age of the units being redeemed.
Exit Load Formula
The exit load formula can be used to calculate the amount deducted when redeeming mutual fund units during the applicable exit load period.
Redemption Value = Units Redeemed × Current NAV
Exit Load Amount = Redemption Value × Exit Load Percentage
Final Payout = Redemption Value − Exit Load Amount
How to Calculate Exit Load in Mutual Funds?
Suppose an investor redeems 500 units at a current NAV of ₹100, and the applicable exit load is 1%.
Step 1: Calculate Redemption Value
500 × ₹100 = ₹50,000
Step 2: Calculate Exit Load
₹50,000 × 1% = ₹500
Step 3: Calculate Final Payout
₹50,000 − ₹500 = ₹49,500
Therefore, the investor receives ₹49,500 after deducting the exit load.
Exit Load vs. Expense Ratio
Exit load is a fee charged when you redeem mutual fund units before the specified period, while the expense ratio is the annual fee charged by the fund for managing and operating the scheme. Exit load is usually deducted at redemption, whereas the expense ratio is adjusted from the fund’s returns over time.
| Basis | Exit Load | Expense Ratio |
| Meaning | Charge for redeeming units within the applicable period | Annual operating expense charged by the fund |
| When Charged | When units are redeemed under applicable conditions | Reflected in the fund’s NAV on an ongoing basis |
| Purpose | Discourages short-term redemptions and helps manage related costs | Covers the fund’s management and operating expenses |
| Applicability | Depends on the scheme and redemption timing | Applies as per the scheme’s expense structure |
Importance of Exit Load in Mutual Funds
Exit load can influence the amount an investor receives when redeeming units and can also discourage premature withdrawals from a scheme.
- Helps Discourage Short-term Withdrawals: It can discourage investors from exiting a scheme too quickly.
- Affects Redemption Value: The applicable charge reduces the amount received when units are redeemed during the exit load period.
- Encourages Planned Investing: Knowing the exit load period can help investors plan their redemption timing more carefully.
Also read: What is CAGR in mutual funds?
How to Avoid Exit Load in Mutual Funds?
Investors can reduce the chances of paying exit load by checking the scheme’s redemption terms and planning withdrawals accordingly.
- Wait Until the Exit Load Period Ends: Redeeming units after the applicable period can help avoid the charge.
- Check Scheme Documents: Review the scheme information document and other fund-related disclosures to understand the exact exit load conditions.
- Plan SIP Withdrawals Carefully: Since each SIP instalment has its own holding period, check which instalments may attract an exit load before redeeming.
- Choose Funds Based on Your Time Horizon: Consider the investment period and redemption requirements before selecting a mutual fund scheme.
- Check Before Redeeming: Always verify the applicable exit load before placing a redemption request, as the charge varies between schemes.
Mutual Fund Redemption Rules to Know
Before redeeming mutual fund units, investors should check the scheme’s applicable redemption conditions.
- Exit Load Period: Check whether the units are still within the applicable exit load period.
- Applicable Percentage: Confirm the percentage that may be deducted from the redemption value.
- Units Being Redeemed: For SIP investments, identify the instalments and units being redeemed.
- Scheme Terms: Check the fund’s latest documents and disclosures because exit load conditions can vary across schemes.
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FAQs
Exit load is a fee charged when mutual fund units are redeemed within the scheme’s specified exit load period.
The charge is deducted from the redemption amount payable to the investor.
Exit load is calculated by multiplying the redemption value by the applicable exit load percentage.
For example, a 1% exit load on ₹50,000 would result in a ₹500 deduction.
Some mutual fund schemes, including certain overnight funds and select other schemes, may have zero exit load.
The applicable charge varies by scheme, so investors should check the fund’s latest documents.
You need to hold the units beyond the exit load period specified by the mutual fund scheme.
The period can vary across funds, so there is no single holding period for all mutual funds.
Yes, SIP investments can attract exit load if the redeemed units are within the applicable exit load period.
Each SIP instalment has its own holding period, so the charge is assessed separately.
The applicable exit load is deducted from the redemption value when you redeem units during the specified period.
This reduces the final amount you receive from the mutual fund investment.
Yes, exit load periods and percentages can differ between equity and debt mutual funds.
The exact charge depends on the individual scheme and its redemption terms.
Exit load is generally applied according to the terms specified for the mutual fund scheme.
Whether any exemption applies depends on the scheme’s stated conditions and applicable regulations.
Check the scheme’s Scheme Information Document (SID), factsheet or official fund details for its exit load terms.
You should verify the applicable percentage and holding period before investing.
Exit load is generally calculated on the redemption value based on the applicable NAV and then deducted from the amount payable. The investor receives the net redemption amount after the applicable exit load is deducted.
