What is Mutual Fund | Mutual Fund Calculator | Types of Mutual Fund | Exit Loads on Various Mutual Fund Types
A Mutual Fund is a collection of individual and institutional investors’ investments. To administer and generate returns, mutual funds require a staff of financial specialists. As a result, it is self-evident that the service is not free. ‘Load‘ is another name for this cost. When a fund’s units are sold or redeemed, certain AMCs levy an exit load.
What is Mutual Fund
Mutual funds work by collecting money together from investors having common investment objectives, that money then gets used by the experts to purchase stocks, bonds, gold, and other securities. As mutual funds invest in a collection of companies, they offer diversification thus a low risk to the investors. An asset management company (AMC) makes these investments on the behalf of the investors. The team that manages mutual funds picks the stocks or bonds that investors’ money shall be put on based on clearly investment objectives.
How Mutual Fund Works
If you are interested in investing in mutual funds, and you don’t know the working method of Mutual funds, then you are at the right place because here we are sharing the modus operandi of Mutual funds with a simple example
Suppose ABCD Mutual funds launch a mutual fund scheme under which ABCD mutual funds collect INR 1 crore from 100 investors. According to this investment required from an individual is INR 1 lakh. The asset management company allows the unit at a net asset value of INR 10 lakh units. ABSL’s top 25 funds objective is to invest across twenty-five stocks. To achieve this fund’s objective, the fund manager does his research and picks the top 25 stocks for investing. The fund manager by keeping the common investment objective of the investors in mind purchases stocks that fit the criteria and will return a significant amount to the portfolio. Upon selecting the shares, the fund manager invests equal amounts across each stock. Thus, the equity fund comprises of top 25 shares.
Benefits of Mutual Funds
- Risk Diversification- To reduce the risk you can simply use mutual funds to diversify your investments across many securities and asset categories such as equity, debt, and gold which helps in spreading the risk. In this, you don’t lose out on the entire value of your investment if a particular component of your portfolio goes through a turbulent period. Thus, risk diversification is one of the most prominent advantages of investing in mutual funds.
- Expert management- When you invest in mutual funds you don’t have to think and examine stocks, markets, and bonds altogether as it is all handled by experts and professionals which however reduces the risk of loss and negative effects on your portfolio. A fund manager continuously monitors investments is the major advantage of investing in mutual funds, risk-free and tension free.
- Affordability- Some mutual funds even offer SIPs as low as Rs. 100, but the general practice is to insist on Rs. 500 as a minimum investment for SIPs. And there are no upper limits for investing in mutual funds.
- Accessibility- Mutual funds are easily accessible and you can start investing in mutual funds right from your home. Mutual funds are available for everyone and everywhere because (AMC) asset management companies offer the funds and it distributes the funds through channels like Brokerage firms Agents and banks Online platforms. This factor makes mutual funds universally available and easily accessible. Even you will be surprised to know that investing in mutual funds doesn’t require any Demat account.
- Liquidity- When it comes to investing in stocks, crypto, or any securities a good investor always takes a look at liquidity which means how quickly you can get your hands on your cash or as per definition it means the ability to turn assets or investments into cash or you can say it the degree to which an asset can be quickly bought or sold in the market at a price reflecting its intrinsic value.
- Well regulated- Mutual funds are regulated by the capital markets regulator, securities, and exchange board of India under SEBI (MUTUAL FUNDS) regulations, 1996. SEBI ensures rules and regulations to ensure investor protection, and transparency with appropriate risk extenuating.
- Best tax-saving options- If are looking for something which can help you to save your taxes then mutual funds are the best option for you. If you invest or sell your share in mutual funds, any amount of your return on the original investment is not taxable. This comes under Equity linked saving schemes (ELSS) help you to save tax under section 8i0c of the IT act. With this scheme, there is a limit on your maximum investment, you can maximum invest Rs. 1.5 lakh in ELSSs.
What Are Mutual Fund Exit Loads?
The exit charge is typically a proportion of the NAV of the mutual fund units held by investors. The remaining amount is credited to the investor’s account after the AMC deducts the exit load from the total NAV. For example, if the exit charge for a one-year program is 2% and you redeem within six months, you will have redeemed well ahead of the agreed-upon investing period. If the fund’s NAV is Rs.35 at the time of redemption, the exit cost is 2 percent of Rs.35, or Rs.0.7. The investor is credited with the remaining sum of Rs.34.30. If an investor completes the agreed-upon fund tenure, he or she will not be charged an exit load upon redeeming the fund.
The cost that Asset Management Companies (AMCs) charge investors when they exit or redeem their fund units is known as an Exit load. If an investor departs the fund within the lock-in period, it is also known as the commission to fund houses or the exit penalty. Exit fees are not imposed by all mutual funds. As a result, while selecting a plan, keep the exit load in mind as well as the expense ratio. It’s important to note that the exit load isn’t included in the expense ratio. Investors in open-ended funds have the option of exiting the scheme whenever they desire.
Exit Load In Mutual Funds: How to Calculate It
Most of the time, the fund manager decides on the exit load. In January 2018, an investor put Rs.10,000 in a mutual fund program. The scheme’s NAV is Rs.100, and there is a 1% exit fee if you redeem before the end of the year. In March 2018, the investor would choose to put Rs.6,000 in the same fund at a NAV of Rs.100. If he redeems the fund in November 2018, when the NAV is Rs.110, how would you calculate the exit fee? How do you calculate the exit charge if you redeem in February 2019 when the NAV is Rs.115? It’s rather straightforward, as illustrated below:
|Number of Units bought in January 2017||Rs. 10,000/100 = 100 (Total NAV/Number of Units bought)|
|Number of units bought in March 2017||Rs. 6000/100 = 60|
For redemptions in November 2018, an exit load of Rs.110 would be imposed for both January and March 2018 investments, based on the current NAV of Rs.110.
|Exit Load||1% of [(100 x 110) + (60 x 110)] = Rs 176.|
|The amount credited to the investor||17600 – 176 = 17424 (Total NAV – Exit fee)|
|For the second investment of March 2017||1% of (60 X 115) = Rs. 69|
If you redeem in February 2019, your January 2018 investment will have completed its one-year term. As a result, there is no exit burden associated with its redemption. However, as shown in the table above, the second investment in March 2018 will be subject to a 1% exit charge.
Exit Loads on Various Mutual Fund Types
Exit loads are charged at varying rates by different mutual funds. These loads are not imposed on all mutual funds, however. It’s a good idea to look at the exit load of the mutual fund schemes you’re thinking about investing in. Let’s look at several mutual fund rates.
- Liquid funds have no entry or exit fees. This means that investors can cash out their investments at any time, and the funds will be sent into their bank accounts the next business day.
- An exit burden may or may not be present in debt funds. However, by aligning the investment tenure with the time period for which the fund charges an exit load, the expense can be ignored.
Exit Load on SIP
When investing through a systematic investment plan (SIP), most investors are bewildered by the concept of ‘Exit Load.‘ Investors have a frequent misconception that if they started a SIP a year ago, they will not be charged an exit load if they sell the investment within the designated time frame. The truth is that the majority of investors are making mistakes.
In reality, the Exit Load on SIP is the same as it is for all other mutual funds. Each SIP installment must be completed within a 12-month time frame in order to avoid the exit burden. For example, if you’ve been investing in a SIP for two years, you’ll need to wait another year, for a total of three years, to get rid of the exit load.
Mutual fund fees, often known as exit loads, apply even if you change from one scheme to another during the source scheme’s exit load period. From the standpoint of the exit load, a switch is viewed as redemption and re-investment.
Yes, even if you sell at a loss, you must pay an exit fee because it is paid on redemption proceeds rather than capital gains. If you redeem inside the exit load period, you will be charged an exit load.
If the transfer from source to destination scheme occurs during the source scheme’s exit load period, you must pay the exit load. It is best to choose a source scheme with no exit load for STP; otherwise, you should start STP after the source scheme’s exit load period has passed.
If withdrawals begin before the end of the exit load period, you will be required to pay the exit load. After the exit load period has passed, it is recommended that you begin SWP.