Exit load: A necessary evil

Most of us are aware of the benefits of making long-term investment in mutual funds (MF) such as compounding effect and netting out temporary market fluctuations. If this wasn’t enough, there is one more reason called exit load which might disincentivise you to make investments for a short period. Exit load is a fee levied by the fund house when you redeem your MF units before a defined time period. Here is a lowdown.

Exit load, calculation

Exit load varies across fund houses and schemes. It is charged as a percentage of the redemption amount (and not just on profits) at applicable net asset value (NAV) at the time of withdrawal. Exit loads are applicable as per a fund house’s policy. For instance, you have invested a lumpsum amount of ₹10 lakh in the direct growth plan of HDFC Top 100 fund and sell the final corpus of ₹11.22 lakh within a year, a 1 per cent of exit load is applicable. Hence about ₹11,200 will be deducted and so your pre-tax redemption amount will be ₹11.11 lakh.

Since systematic investment plans (SIP) buy MF units at different points in time, you should be cautious about the impact of exit load if you plan to sell SIP units in the interim.

Category, fund house wise

Within equity passive MFs such as index funds and ETFs, a majority don’t have any exit load. A few have exit load for tenure as low as 15 days.

If MFs in active equity space are considered, most of the fund houses charge 1 per cent for redemption within one year for a majority of their schemes. However, as per Value Research, there are certain fund houses such as Motilal Oswal and WhiteOak, which charge 1 per cent exit load within lesser period ranging 15-30 days. While PGIM charges 0.5 per cent exit load for redemption within 90 days for all of its actively-managed equity schemes, fund houses such as Navi and Quant do not charge any exit load for a majority of their actively-managed schemes.

Within debt funds, no or minimal exit load is charged for schemes in majority of the categories. For medium-to-long duration funds, generally 1 per cent is charged for redemption within one year, while Nippon India Nivesh Lakshya charges the same within that of 1,080 days. 

According to Value Research data, a majority of fund houses charge 1 per cent load for redemption within 365 days for credit risk funds, while fund houses such as ABSL, BOI, Franklin and SBI charge fees as high as 3-4 per cent for redemption within one year.

In the hybrid space too, a majority of funds charge one per cent for redemption within one year. However, there are some outliers. Arbitrage funds charge as low as 0.25 per cent for withdrawal within 30 days. SBI Magnum’s and Axis’ Children benefit schemes charge as high as 3 per cent exit load within one year. While schemes such as Tata Retirement Savings scheme charge the usual 1 per cent exit load, the tenure, however, is as high as 1,829 days. In the balanced hybrid space, Franklin India Pension scheme charge as high as 3 per cent exit load but the tenure is lower — 58 days. Retirement savings-based schemes of SBI, PGIM, Sundaram and UTI don’t charge any exit load for redemption.

What investors should do

It has been observed that equity funds have a higher tendency to charge exit load since they want investors to stick to longer investment tenures. Passive schemes across categories usually charge no exit load.

Exit load charged by the fund houses is added back to the scheme and consequently can effect the scheme’s NAV which benefits the investors who stayed in the fund for a longer tenure. Investors need to note that whenever there are changes in the fundamental attributes of a scheme, investors get a period of, say, 30 days to exit the fund without any fees for any period of time. Do note the selection of fund should primarily depend on the investment goals and risk appetite, and not based on exit load.

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