Since our childhood, we were taught about the importance of investing. And mutual funds were the most easy-to-go option for our simple minds. But did you know that these so-called 'financial heroes' eat away your returns? There are a lot of charges levied by AMCs, without you being aware of it. One such expense is the exit load.
In this article, let's understand everything about the exit load. And the ways to avoid it.
What is Exit Load?
For a business, a customer is everything. The same holds true for Asset Management Companies (AMCs). To demotivate the investors from selling their investments before the lock-in period, AMCs levy an additional fee. The fee AMCs charge from the investors at exiting the mutual fund is called an exit load.
It is present in most mutual funds. But open-sourced mutual funds don't levy an exit load as they give the investors the freedom to exit whenever they want. After reading so far, you would have got insights about the concept of exit load and the reason for levying it. Now, let's understand how to calculate exit load in the case of mutual funds.
How to Calculate Exit Load?
Generally, it is levied based on the Net Asset Value (NAV) of the mutual fund. However, the rate is not fixed and varies from one company to another. On redemption, the AMCs deduct the exit load from the total NAV of your investment and credit the balance in your bank account. But if you don't exit the mutual fund during the lock-in period, you don't have to pay any charge while redeeming!
For example, if the exit load is 3% and the NAV of the fund at the time of redemption is Rs 50. The AMC will deduct Rs 1.5 and remit the remaining Rs 48.5, assuming you bought only one unit of the fund (which we obviously don't suggest).
Exit Load on Different Types of Mutual Funds
Can you believe that companies have different exit loads for different types of mutual funds? It may sound weird but absolutely true and rational. If you want to understand in detail, here are some examples.
- There is no exit load on liquid mutual funds. As the name suggests, liquid funds are highly liquid mutual funds. They can be redeemed as per your wish. So, it would have been unwise to levy an exit load on these funds. After all, what is the purpose of liquidity when you have to face a penalty to withdraw your own money?
- Some debt funds may not have an exit load. Probably, AMCs are trying to encourage debt funds. But beware of the other charges! They may be more than an exit load on that fund.
- Most investors have a misconception regarding exit load on Systematic Investment Plans (SIPs). They believe that the lock-in period is considered from the date of the first instalment. But, remember one thing: SIPs are a type of mutual funds only! So, the lock-in period is considered for each instalment.
For instance, If the lock-in period is 1 year and the tenure of SIP is 3 years, you may have to pay an exit load if you redeem the entire investment in the third year. To get rid of the exit load, you will have to wait for an additional year. So, the total lock-in period becomes 4 years in this case.
No-Load Mutual Funds
As mutual funds have a plethora of charges which reduce your returns. The no-load mutual funds are popular among investors. Here, the AMC doesn't charge a commission on the invested amount. But it doesn't mean that there will be other charges. The remaining expenses will not be waived off. After all, there is no free lunch in today's world!
Anyways, they offer the following benefits to investors:
- Better Returns: Did you know that the entry and exit load can be up to 3% of NAV? It may seem insignificant now, but it makes a substantial difference in the long run. Most investors invest in mutual funds for the long-term, don't they?
- Returns for the whole amount: In the case of a load fund, there are charges applicable at entry. E.g., If you invest Rs 1000, AMCs may deduct Rs 30 as load. It means that only Rs 970 will be invested. Naturally, the returns would be relatively lower.
- Independence of Broker: No load fund is more suitable for financially literate investors. They can eliminate the intervention of brokers and can take decisions themselves. This helps in avoiding the brokerage cost and taking decisions themselves. In simple words, investors become Atmanirbhar in a no-load fund.
- Cost-Effective: This type of fund doesn't have any sales commission or distributor fee. So, the expense ratio is relatively lower. And the inverse relationship between cost and profit helps in maximizing the returns.
After knowing many advantages of no-load funds, you might be wondering about the mutual funds currently active in India. Unfortunately, you would have to research thoroughly. As most of the no-load funds have already been closed. After all, AMCs also have to earn profits, isn't it? So, they have either closed these funds or converted them into other types of load funds.
The Bottom Line
An exit load is a fee AMCs charge the investor at exiting or retrieving the mutual fund units. It is levied to discourage the investors from selling their investments before the lock-in period is over. It is a percentage of the Net Asset Value of the mutual fund. At the time of redemption, the exit load is deducted from the closing balance.
Generally, they are not levied on liquid and debt funds. In SIPs, the lock-in period is considered from the date of the last instalment. No-load funds don't carry any entry or exit load. Here, the whole amount is invested without deducting any charges. And they give better returns and are cost-effective. But it is rare to see a no-load fund nowadays.
In the end, remember that long-term investing is the key to create wealth. So, invest in mutual funds for the long-term and forget the pain of exit load altogether. Cheers!!