When you invest in mutual funds, you are expected to adhere to an investing discipline in order to achieve your financial goals. While early redemption could keep you farther from your financial goals, you would also be made to bear exit load on this.
It is interesting to learn that asset management companies (AMCs) used to charge an entry load as well at the time of investing into funds. But that was before 2009 when entry load was phased out.
However, the exit load continues to stay. The rationale behind charging exit load is to levy a small penalty for redeeming a mutual fund within a short period, i.e., less than a year.
However, most funds do not charge any exit load after this time period expires.
How is the exit load charged?
Exit load is levied the net asset value (NAV) of mutual funds. For example, when exit load is kept at 1 percent of NAV, and an investor decides to redeem units worth ₹1,000 then she will receive the balance amount i.e., ₹1,000 – 10 = ₹990 after deducting exit load.
It is worth mentioning that the Securities Exchange Board of India (Sebi) has imposed maximum rates of exit load beyond which mutual fund houses cannot charge.
Exit load is usually charged for redeeming open-ended mutual funds before the expiry of a specific period. Liquid mutual funds, at the same time, do not usually charge exit load.
Besides this charge, investors are also meant to pay capital gains tax at the time of redemption. The capital gains tax could be short term or long term based on the duration for which the mutual funds are held before redeemed.
Investors of equity oriented mutual funds are also meant to bear costs incurred on account of securities transaction tax (STT).
To sum up, mutual fund houses tend to levy a charge in the form of a small percentage of net asset value (around 1 percent) for redeeming mutual funds within a short period of buying.
This charge is known as exit load.