Investment word of the day: As a mutual fund investor, it’s essential to understand the key charges associated with these investments to make informed decisions. One such charge is the exit load.
What is exit load?
Exit load is a fee charged by asset management companies when an investor makes a partial or full withdrawal from a mutual fund within a specified period. This charge is typically imposed to discourage early redemptions — that is, withdrawing funds before the completion of the lock-in period, which is the minimum duration for holding the investment.
Therefore, an exit load can help reduce the number of early withdrawals from mutual fund schemes. It is typically charged as a percentage of the Net Asset Value (NAV), which represents the market value of the securities held by the scheme.
How is exit load determined?
Exit load fees vary across different mutual fund schemes and are determined by the type of fund in which you invest. Notably, not all mutual funds impose an exit load, many schemes allow withdrawals without any such charge.
Why is exit load important?
One of the major objectives of exit load is to encourage long-term investing inmutual funds.
“The purpose of exit load is not income generation, rather it seeks to incentivise long-term investing, which is in the spirit of mutual funds. Most mutual funds, particularly equity ones, are designed for investors over the long investment period,” according to Siddharth Maurya, Founder and CEO, Vibhavangal Anukulakara Private Limited.
“The rampant buying and selling of mutual funds by investors results in funds operating under liquidity constraints, which compels fund managers to sell securities during the bare minimum period, which can severely impact the fund’s returns. Exit load is intended to reduce that chaos by encouraging the longer holding period,” he added.
While encouraging such investments, exit load also aim to protect long-term investors from the costs of early redemption.
“Exit loads protect long-term investors from costs caused by other investors exiting the fund early. If there were no exit load, the costs of early redemptions would have to be paid by all investors, including those who do not wish to leave the fund and those who stay in it,” Maurya said.
According to the expert, exit load provides fund managers with some flexibility to implement tactical and strategic investment policies without the concern of fund performance being affected by unexpected short-term redemptions outflows.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.