Understanding the Concept of Entry and Exit Load in Mutual Funds

Understanding the Concept of Entry and Exit Load in Mutual Funds

Asset Management Companies may collect a charge from investors when they enter or exit a mutual fund scheme. That is, each time one buys or sells units in the mutual fund, a charge will be payable and this charge is of two types - the entry load and the exit load. So, let’s understand both of these concepts and their impact when it comes to mutual funds.

What is Entry Load In Mutual Funds?

An entry load can be defined as the amount or fee paid by an investor upon entering a scheme as an investor. The general purpose of collecting an entry load was to offset the distribution costs incurred by the Asset Management Company. 

In a few equity based mutual fund schemes, there used to be an entry load. However, as of August 2009, the Securities and Exchange Board of India (SEBI) has abolished the practice of imposing entry loads on mutual funds.

What is Exit Load In Mutual Funds?

An exit load refers to a fee or charge imposed on investors by AMCs when they choose to withdraw or exit from a Mutual fund scheme. The primary objective behind imposing this exit load upon investors is to dissuade them from doing so. 

It is important to note that different mutual fund schemes apply different fees as an exit load. However, not all schemes impose exit load on the investors. So, when choosing a mutual fund scheme for investment, the aspect of “exit load” may be an important consideration. 

In mutual funds, exit load is charged as a percentage of the Net Asset Value (NAV) of the mutual fund units held by an investor, in case of redemption. The Net Asset Value represents the market value of each unit of a mutual fund scheme. Typically, mutual funds deduct the exit load as a percentage on the total NAV of the units being redeemed by the investors.

How to Calculate Exit Load in Mutual Funds?

The rate of exit load depends on the type of mutual fund you have invested in. Some mutual funds impose an exit load in case you redeem your investments early. Some funds don’t have any exit loads at all. Let’s consider an investor who has invested ₹80,000 in an equity oriented mutual fund scheme. This mutual fund scheme has an exit load of 1% if the investor redeems before a tenure of 1 year.

Invested amount (A): ₹ 80,000
NAV at the time of investment (B): ₹ 250
Units bought (C = A/B): ₹ 80,000/250 = 320

Now, let’s consider two scenarios-

Scenario 1: Investor redeems the entire invested amount after 1 year
NAV at the time of redemption (D): ₹ 280
Exit Load [E = 0% of (CxD)]: 0% of (320 x 280) = 0
Final Redemption amount (CxD) - E: ₹ (89,600 - 0) = ₹ 89,600

Scenario 2: Investor redeems the entire invested amount before 1 year
NAV at the time of redemption (D): ₹ 220
Exit Load [E = 1% of (CxD)]: 1% of (320 x 220) = ₹ 704
Final Redemption amount (CxD) - E: ₹ (70,400 - 704) = ₹ 69,696

In scenario 1, the investor receives the full redemption proceeds into their account as no exit load is applied after a period of 1 year. However, in scenario 2, as the investor has redeemed before completion of 1 year, they have been subjected to a 1% exit load which is deducted from the total redemption proceeds, and the remaining amount is paid to the investor. This calculation is simplified to explain the impact of exit loads on redemptions.

How Do Exit Load Differ for Different Types of Mutual Funds

Different mutual fund schemes levy different exit load charges. However, not all mutual fund schemes have exit loads. Let’s check out how these rates differ on some of the different types of mutual fund schemes:

Liquid Funds: Mutual Funds can charge exit load on investors who exit their Liquid Fund schemes within 7 days of their investment. Post that period there will be no exit load charged on these funds. Please refer to below table for the exit load on the liquid schemes in accordance with SEBI (Mutual Funds) Regulations, 1996:

• Debt Funds: These funds may or may not have an exit load. An investor can eliminate the scope of exit load in these funds by completing the tenure of investment, if any. 
• Index Funds: Many Index funds usually do not levy any exit load. 
• Equity Funds: Exit loads in these funds are generally higher than Liquid Funds due to their long-term investment nature. 
• Hybrid Funds and Arbitrage Funds: Arbitrage Funds are a type of scheme that come under Hybrid Funds as per SEBI’s categorization of Mutual Funds. You may experience an early exit load when it comes to these funds.

Impact of Exit Load on Mutual Fund Returns

Exit load may affect an investor’s return. In case of funds with no exit loads, investors may exit the scheme without incurring exit costs for selling units.

For instance, none of the schemes of Zerodha Fund House charges the exit load.^

^This statement regarding Zerodha Fund House schemes not charging exit loads is in accordance with the SEBI Mutual Fund Regulations and reflects the status as of date of issuance of this blog. Please note that regulations and fund policies are subject to change, and it's advisable to verify the current terms and conditions before making any investment decisions. The information provided does not constitute financial advice.

Conclusion

Understanding the concept of loads is crucial if you are planning to invest in mutual funds.Always check the exit load of the type of mutual fund schemes you are investing in, as they can significantly affect your investment outcomes when it is time to redeem them.


Mutual Fund investments are subject to market risks, read all scheme related documents carefully

Please note that this article or document has been prepared on the basis of internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.

Published on Apr 24 2024