Mutual Funds offer great returns in the long run. Patience is of great importance when it comes to investing. Sometimes mutual fund investors opt for redemption without understanding the nature of schemes. In order to control such early redemption, some mutual fund schemes charge exit load. This article will detail about exit load and its various types. You will also know about exit load for various scheme categories.
What is Exit Load?
Exit Load in Mutual Fund Schemes is the percentage of fees charged on the NAV to exit from a scheme. This is charged only when the investor redeems in the period for which the exit load is applicable. Exit load is often referred to as redemption charge or redemption fee. This amount charged in the form of exit load will be credited back to the scheme.
Exit load prevents affecting the scheme’s NAV from premature withdrawals of huge amounts by the investors. Exit load also encourages investors to stay for longer period of time and prevent them from paying tax on STCG.
Types of Exit Load
Exit loads are of three types. Flat structure, Conditional structure and Tiered structure. There could also be a hybrid structure combining all of these three types. Lets see each type in detail.
1. Flat Structure Exit Load
Flat structure exit load involves fixed percentage charged when the investor redeems within the defined period. Let us consider the mutual fund scheme, Franklin India Equity Fund (G). As of Nov-2018 it has an exit load 1% if units are redeemed or switched-out within 1 year from the date of allotment.
If you stay invested in Franklin India Equity Fund (G) for more than a year, then there will not be any exit load. This is how a flat structure exit load is applied with fixed percentage for a fixed period of time.
|Redeemed/Switched out between (days)||Exit Load (%)|
|Beyond 365 days||NIL|
2. Conditional Structure Exit Load
In conditional structure, the exit load is charged based on the percentage of units being redeemed within defined period of time. For example consider, Indiabulls Savings Income Fund Direct – Growth. For this scheme, if you redeem within one year, then the exit load is 1% provided that you redeem more than 12% of units allotted. NIL otherwise.
|% of Units Redeemed||Holding Period (days)||Exit Load (%)|
|<=12%||Within 365 days||NIL|
|>12%||Within 365 days||1%|
|Any %||Beyond 365 days||NIL|
The conditional structure is a rare form of exit load type that you can observe in any mutual fund schemes.
3. Tier Structure Exit Load
Tier Structure exit load involves variable percentage defined for varying duration. Let us consider the mutual fund scheme, Parag Parikh Long Term Equity Fund – Direct Plan (G). As of Nov-2018 it has an
exit load of 2.00% if the investment is redeemed or switched out on or before 365 days from the date of allotment. And 1% if the investment is redeemed or switched out after 365 days but on or before 730 days from the date of allotment.
The following table shows how a typical Tier Structure Exit load looks like. This is the exit load of Parag Parikh Long Term Equity Fund – Direct Plan (G)
|Redeemed/Switched out between (days)||Exit Load (%)|
|0- 365 Days||2%|
|Beyond 730 days||NIL|
How does Exit Load differs for Direct and Regular Plan?
Exit load will be same for Direct and Regular Plans of a same mutual fund scheme. Its only that the Total Expense Ratio (TER) that varies from regular to direct funds of a same scheme. Generally TER of any given Regular Mutual Fund will be higher than the TER of Direct Mutual Fund that belongs to same scheme.
Exit Load in case of improper ARN Code
In cases of wrong/ invalid/ incomplete ARN codes mentioned on the application form, the application shall be processed under Regular Plan. The AMC shall contact and obtain the correct ARN code within 30 calendar days of the receipt of the application form from the investor/ distributor. In case, the correct code is not received within 30 calendar days, the AMC shall reprocess the transaction under Direct Plan from the date of application without any exit load.
Types of Schemes with Exit Load
Exit loads are more prevalent in Equity Schemes and its derived categories such as Hybrid schemes, Balanced schemes.
Fund Categories with High Exit Load
There is no such rule of thumb identified by MFRepublic as of today to classify schemes categories with high, low exit loads. But general observation is, the schemes that demand long term investments has higher exit loads. To be precise, exit load is generally higher for Long term Equity mutual fund schemes.
Fund Categories with Low Exit Load
Arbitrage funds are identified to have lower exit loads with short duration of investments.
Fund Categories without Exit Load
Equity Linked Saving Schemes (ELSS), Short Term, Ultra Short Term and Debt schemes generally do not have exit loads. Though there might be some exceptional cases too.
What if Exit load is changed after I invest in a scheme?
Mutual funds cannot increase the exit load beyond the level mentioned in the offer document. Any change in the load will be applicable only to prospective investments and not to the original investments. In case of imposition of fresh loads or increase in existing loads, the mutual funds are required to amend their offer documents so that the new investors are aware of loads at the time of investments. As no entry load can be charged for mutual fund schemes in India, no change can be made with respect to entry load.
Redeem Mutual Fund without paying Exit Load
This happens very rarely. If the mutual fund changes the nature of the scheme from the one specified in the offer document, then the unit holders have the right to exit the scheme at the prevailing NAV without any exit load.
The change in terms of the scheme, known as fundamental attributes of the scheme like portfolio structure, investment pattern, etc., In such situations, investors if they wish, can redeem without any exit load even if the investment period criterion for exit load is not met.
Limits on Exit Load
As per SEBI (Mutual Funds) Regulations, 1996, in respect of Open Ended Schemes, Repurchase Price (commonly referred to as Redemption price) shall not be lower than 93% of NAV. Provided that in respect of Closed Ended Schemes, the Repurchase Price of the units shall not be lower than 95% of the scheme NAV.
|Scheme Type||Max Exit Load (%)|
|Open Ended Schemes||7%|
|Closed Ended Schemes||5%|
The Open Ended schemes can have maximum of 7% of exit load levied per unit holding and Closed Ended schemes can have maximum of 5% of exit load.