Exit Load in Mutual Fund: Meaning & Types
Free things are always taken for granted; hence mutual fund companies charge a grant from the investors for their exit from the mutual fund investment when they fail to invest consistently and want to take an exit.
A mutual fund is a basket of investments for individuals and institutions. It involves a team of financial experts to manage and generate returns, which comes with a fee or “load.” Mutual fund companies collect a fee from investors for joining or exiting a fund. If a company imposes a fee for leaving their service, it is called an “exit load.”
This article aims to simplify exit load in mutual funds and its types.
What is Exit Load?
An exit load is a fee which investors must pay when they sell or withdraw their investments. It is like a penalty or charge for leaving the fund before a certain period. However, not all funds require investors to pay this fee when they sell their investments.
What is an Exit Load in a Mutual Fund?
An exit load in a mutual fund is a charged fee by the firm if the investors exit the scheme within a certain period from the investment date mentioned in the Scheme Information Document.
However, some schemes do not charge any exit fee. Mutual funds charge exit loans as the investors redeem the money before a notified time. The existing load is charged to protect people from continuing their interest in long-term financial plans, especially those still investing in the company.
Exit load fees vary from multiple mutual fund houses. To make informed investment decisions for short tenures, it’s important to grasp the exit load structure of the scheme.
Many investors get confused about the term “Exit Load” when investing through SIP. Simply put, when you invest in SIP, each installment is considered a new purchase. So when you take out the money from the investment firm you invested, they will levy an exit load on you. The fee depends on how much money you invested and how much you want to withdraw.
Exit Loads on Different Types of Mutual Funds
If you leave your mutual funds investments, some firms ask you to pay a fee for selling your investment, called an “exit load.” But not all mutual funds have this fee. It’s important to check if your interest in the mutual fund charges an exit load.
Here are a few examples of fees that some mutual funds charge when you exit the investment.
● Equity Funds
Equity funds are risky, but they have the potential to provide potential rewards.
If you exit your investment within a year, you may have to pay a fee of 1% to 2%, called an exit load.
● Debt Funds
These funds invest in safer options like bonds and government securities. They have lower risks and returns compared to equity funds. If you sell your investment before a specific time, you may have to pay a fee of 0.25% to 1% as an exit load.
● Hybrid Funds
These funds aim to balance risks and rewards by investing in a combination of stocks and safer options. The exit load can vary based on the proportion of stocks and safer investments in the fund. Funds with more stocks might have higher exit loads.
● Index Funds
These funds track a particular market index and invest in the same stocks as that index. They have lower fees compared to other funds. The exit load for index funds is usually low, around 0.25% to 0.5%, and sometimes there is no fee.
● Fund of Funds (FoFs)
These funds invest in other mutual funds to provide diversification. The exit load for FoFs depends on the mutual funds they invest in. Some FoFs have a two-tiered exit load, with a higher fee if you sell your investment early and a lower fee after a certain time.
Conclusion
Exit loads are important for investors to consider when investing in mutual funds. They help you estimate your returns after deducting all expenses. Being aware of the exit load is crucial to avoid unexpected fines affecting your planned investments.
Before making any investment decisions, carefully review the exit load structure of a mutual fund house you are investing in and understand the potential costs of exiting the fund. Doing so lets you make informed decisions that align with your financial goals and maximize your long-term returns.
