What is exit load and how is it calculated?

When you redeem your mutual fund units not too long after you bought them, you might have to pay a fee to the asset management company (AMC) at the time of sale. The net cash inflow, therefore, will be arrived at after deducting this fee, also known as exit load, from the sale proceeds for exiting the scheme ‘prematurely’.

What is exit load?

Exit load is a form of penalty charged by mutual fund house when an investor makes a partial or full redemption within a stipulated period of investment. The time period for which it applies varies from scheme to scheme.

It is vital to note that the time period is calculated from the date of investment – be it lumpsum or SIP. Also, the exit load which is applicable at the time of investment is levied.

How is it calculated?

Let us suppose, someone invested ₹50,000 lumpsum on October 1, 2021 and the fund house’s exit load was one percent for the next one year. The net asset value (NAV) of the fund at the time of purchase was ₹20 and hence, investor was allotted 2,500 units.

In less than one year i.e., on August 1, he decides to redeem half of the units. If the NAV is ₹25 at the time of redemption, he should ideally be entitled to receive ₹1250 X 25 = ₹31,250.

But since he is selling his units before the expiry of one year, the transaction will attract exit load at the rate of one percent.

Exit load therefore will be 1 percent of 1250 X 25 = ₹312.50.

So, the amount that he would receive after redemption would be ₹31,250 - 312.50 = ₹30,937.5.

However, it is important to note that in case of SIP, each SIP would be considered a separate investment and exit load will be calculated accordingly.

For example, someone invests ₹1,00,000 via SIPs on different dates:

If the investor wants to sell all units on May 15 i.e., more than one year of buying 1,000 (500+500) units. It means only half of the units will be subject to exit load.