Several investors often whine that the expected amount they were liable to receive on sale of their mutual fund investments is slightly less. Do you know the reason behind it? Mutual fund houses or Asset Management Companies (AMC) manage mutual fund investments on behalf on investors and try to take their investments towards growth. These fund houses charge a small fee to investors upon exiting the mutual fund scheme before a stipulated time period. This fee is known as exit load or penalty or exit commission. Read on to understand more about exit loads and how you can avoid them to have a greater take away income.
What is exit load in mutual funds?
As defined by the self-regulatory body of mutual funds in India – AMFI (Association of Mutual Funds in India), exit load is referred to as a penalty charged by mutual fund houses for early redemptions. This is done to daunt investors from disposing their mutual fund investments too soon.
How is exit load calculated?
The structure of exit load of any scheme needs two constraints, namely, – the fees charged as a percentage of the redemption amount at the applicable NAV (Net Asset Value) and the exit load period. The exit load is usually a certain percentage of the NAV of the units held by an individual. Once the AMC removes the exit charge from the net NAV of the fund, the outstanding amount is transferred to the investor’s account. Let’s understand the calculation of exit load on mutual funds with the help of an example.
Somya invests Rs 30,000 in a mutual fund scheme in June 2015. The mutual fund scheme has an exit fee of 1% when sold before 12 months. The NAV of the fund is Rs 300 which means that Somya has 100 units (30,000/300). Now, if Somya wishes to redeem her mutual fund units after nine months, i.e. in March 2016, she would be liable to pay an exit fee as per the following calculations:
Amount invested in June 2015 – Rs 30,000
NAV at the time of investment – 300
Units bought – 100
NAV at the time of redemption – 270
Exit load – 1% of (270*100) = 270
Final redemption amount = (270*100) – 270 = Rs 26,730
Exit fees are valid on specific mutual funds to dampen early redemption from particular schemes. Thus, it is vital to be watchful of the exit load fees allied to your mutual fund investments as it is useful in understanding the total returns on your mutual fund investments after all costs are considered. What’s more, when you are mindful of exit fees on mutual fund investments, it helps to invest in mutual funds in a stress-free manner. Thus, you can easily dodge paying exit fees provided that you cautiously plan the sale of your fund units wisely. Happy investing!