What is Mutual Fund? Types of Mutual Fund with Expense Ratio, Exit Load

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.

Mutual Fund

About Mutual Fund

A mutual fund means a trust established to raise funds by selling units to the general public or a segment of the general public under one or more schemes for investing in securities, gold or gold-related instruments, money market instruments, real estate assets, and other assets and instruments as the Board may specify from time to time.

In its most basic form, a mutual fund is a common pool of money into which investors invest their money. This total is then invested in accordance with the fund’s investment goal. Stocks, money market instruments, bonds, gold, real estate, and other comparable assets might all be used to invest the funds. These funds are managed by money managers or fund managers who, by investing in accordance with the investment aim, attempt to increase the value of the fund for investors.

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.

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Exit Loads

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 2017Rs. 10,000/100 = 100 (Total NAV/Number of Units bought)
Number of units bought in March 2017Rs. 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 Load1% of [(100 x 110) + (60 x 110)] = Rs 176.
The amount credited to the investor17600 – 176 = 17424 (Total NAV – Exit fee)
For the second investment of March 20171% 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.

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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.

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When transitioning from one scheme to another within the same AMC, what is 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.

Will I have to pay an exit load if I sell a mutual fund at a loss?

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 I choose STP, will I have to pay a mutual fund 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 I choose the SWP option, will I have to pay an exit load?

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.

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