What is exit load in mutual funds; know how to calculate it

Kolkata: Exit loads are one of the most important features of a mutual fund that an investor should consider before investing in an MF scheme. The name itself indicates that exit loads act as a disincentive to investors redeeming their units in any MF scheme "prematurely". The basic objective of a mutual fund is stability of investments and exit loads act as a tailwind towards that end. It can be viewed as a protection against early redeeming of units.

"It is a fee that acts as a financial barrier, discouraging investors from selling their units prematurely and promoting a more committed approach to their investment journey... This fee highlights the importance of aligning investment strategies with the specified holding period, promoting an environment where investors can fully benefit from their chosen funds," writes ICICI Bank. Significantly, ICICI Prudential AMC is a joint venture between ICICI Bank and Prudential plc.

When an investors commits his/her resource to a mutual fund, he/she is expected to be committed in the journey. The exit load is designed to ensure a level of commitment. Another role of exit load is to preempt frequent selling of mutual fund units, which could have a negative impact on the equity markets. By preventing frequent redeeming of MF units, exit loads contribute to prevention of volatility in the markets. No investor like volatility and, therefore, exit loads contribute to the health of the equity markets.

Exit loads offer some sort of relief to the fund managers too. They can pursue their long-term strategies without bothering for high frequency redemptions by investors. On the other hand, investors turn more responsible. Else many of them would have whimsically opted for redemption. Therefore, in a sense, exit loads force investors into responsible behavior. It also leads to a more responsible investment climate since investors don't redeem mindlessly.

Usually, exit loads are the highest in actively managed equity funds. Index funds usually have no exit loads. Debt funds generally have exit loads that are lower than equity funds and sometimes they are waived after a certain holding period. It is quite obvious that all other factors being equal, an investor usually selects a fund that has a lower exit load.

The calculation of Exit Load of an MF scheme is not a complicated process. The first step consists in determining what the specified holding period of a fund is. It varies from fund to fund. Then find out the exit load from the information document of the mutual fund scheme. The exit load is prominently displayed with all documents of an MF scheme, whether online or offline. The exit load is expressed as a percentage.

The next step is easy. One has to multiply the percentage of the exit load by the redemption amount. For example, if an investor sells MF units worth Rs 50,000 and the exit load is 1.5%, the exit load one has to pay is Rs 50,000 X 1.5% = Rs 750.