What you need to know about exit load

What is exit load?

Exit load is a cost that an investor needs to bear if he or she sells the mutual fund units before a predefined time frame. Typically, equity mutual fund schemes levy an exit load of 1% if the units are sold within one year of buying. Simply put, it is a mechanism to deter investors from premature withdrawals.

Do all schemes levy exit load?

Not all, but most of the schemes do levy an exit load. Mostly the exit load is levied for selling the units within one year of buying but there are some funds that have a longer period defined for the levy of such load. Debt funds, too, levy an exit load but the period could be as low as a day or a month since the overall tenure of the fund could be only a few weeks or months. Also, fund houses, if they so desire, can levy a higher exit load as well.

Why is exit load levied?

While the most obvious reason is to discourage investors from early redemption while encouraging building a long-term corpus, an exit load helps the fund manager as well.

With the assurance that money will not be flowing out regularly in the form of frequent redemption pressures, a fund manager can better plan the investment of the corpus. If there’s a history of regular redemption requests, the fund manager will be forced to keep a portion of the corpus as liquid cash to merit such redemption pressures or else will have to rejig the portfolio to generate cash.

This, in turn, would affect the long-term returns of the scheme as the fund manager might be forced to sell the most liquid stocks to generate cash.

Are exit loads mandatory?

It’s not mandatory but most fund houses levy it for a variety of reasons explained above. Investors should remember that exit loads in no way reflect the quality of the fund. Exit load is only a mechanism to discourage early redemptions.

Where does the exit load go?

Earlier, fund houses could use the exit load money for their sales and marketing expenses but in 2012 the Securities and Exchange Board of India (SEBI) changed the regulations. As per the amended norms, the exit load money is put back in the scheme. This was essentially done so that investors who continue to stay invested in the scheme do not lose out on account of investors who exit. To compensate the fund houses, however, the regulator allowed a higher expense ratio to be charged to meet the fund management expenses.

Can exit load be avoided?

Exit loads can be avoided if the investor smartly plans his or her sale of units. If investments are being made through systematic investment plans (SIPs), then an investor can choose to sell only those number of units that have been bought more than an year ago. So, for instance, if an investor has 1,000 units and out of that 600 units were bought over an year ago then only 600 units can be sold to avoid paying exit loads.

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Printable version | Sep 18, 2021 7:04:05 PM |

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