FundsIndia Explains: What is exit load?

Wondering how an exit load is charged? How much goes out as exit load for a fund? Here’s a quick guide.

What is an exit load?
An exit load is a charge. It applies when you redeem your fund before a specified number of months from the date on which you got your units. This charge is a percentage, applied on the NAV, and the reduced amount is credited to you. Say a fund defines its exit load to be 1% on redemption within 365 days. You invested in the fund on 5th January 2016. You want to redeem it today, when the fund’s NAV is Rs 15. Since 26th September is well before the 365-day period, you will suffer the exit load. In that case, the price at which you will actually receive funds will be Rs 14.85. The exit load amounts to Rs 0.15 (1% of Rs 15), which is deducted and given you. If, on the other hand, you were to redeem on 10th January 2017, it is beyond the 365-day period and you will not have to pay exit load. Remember that switching out of a fund also qualifies as redemption. Units under dividend reinvestment don’t, however, suffer exit loads.

How are exit loads calculated in SIPs?
For each SIP instalment, the exit load is calculated. So if the load period is 12 months, each SIP instalment will have a 12-month period within which the load applies. The same rule applies if you make multiple lump-sum investments in a fund at various points. Exit loads follow the first-in-first-out rule, just as with taxation.

What is the exit load rate?
You need to check each fund for its exit load and period. Each fund defines its own exit load, usually in the range of 0.25 to up to 3%. A fund can either have one exit load – like 1% on redemption before 365 days, or 0.5% on redemption before 180 days, and such. Or, it can adopt a staggered approach, charging 1.5% for redemptions before 365 days, 1% on redemption between 366 and 730 days, and 0.5% on redemption between 731 and 1095 days.

Liquid funds don’t have exit loads. Nor do, barring a few, ultra-short term funds. Short-term funds levy exit loads on short periods such as 60 days or 180 days and so on, while exit load periods are at around 1 year for long-term debt funds. The rate itself will vary – some corporate bond funds charge 2-3% on exits within a year.

As a general rule, equity funds have longer exit load periods than debt funds. The idea behind this stems from the purpose of exit loads, which is to discourage early redemptions and limit frequent churn of money in the portfolio. Equity requires a longer holding period than debt, and so equity funds define longer exit load periods. There are exceptions to this rule. Besides, some AMCs have scrapped exit loads altogether. Exit loads can also give you some idea of the minimum amount of time you need to hold the fund.

What happens when there is a merger of schemes?
When two funds merge (for whatever reason – takeover of an AMC by another, consolidation of schemes, change in fundamental attributes) exit loads do not apply. In these instances, investors in the merging fund are provided with a window of a number of days to inform the AMC that they do not wish to become a part of the merged or new fund and so redeem their fund. If you redeem your fund in this window, exit loads won’t apply. If you redeem it after the window closes, exit loads will apply.

What happens to the money collected from exit loads?
Proceeds from exit loads, net of service tax, are credited back to the fund itself.