If creating wealth over the long term is your priority, investing in mutual funds is one way to satisfy this goal. However, before you proceed to invest in one, you need to first be aware of the various costs associated with them.
Among the different charges levied on mutual funds, one of the most important ones is the exit load. Getting to know what it is can help you make a more informed investment decision. Here’s an overview of what it is.
The exit load is a charge that’s levied by mutual fund houses when you redeem your investment partially or completely before the end of a specified period. However, if you choose to redeem your units after the specified period has passed, no exit load will be charged by the fund house.
The concept of exit load was brought into force to discourage investors from prematurely withdrawing their investments. That said, presently, very few fund houses charge an exit load. Also, the exit load on mutual funds tends to vary from one fund house to another. Therefore, this is something that you would need to keep in mind when investing in one.
For instance, let’s say that you’ve invested ₹1 Lakh in a mutual fund. According to the terms of the fund, you’re required to hold the units for at least 6 months from the date of investment. And if you choose to withdraw your investment before the expiry of the specified 3 months, you will be charged an exit load of 1% of the total value of the investment.
Assume that by the 5th month, you wish to withdraw your investment entirely to meet emergency fund requirements. By this time, your investment has grown to ₹1.3 lakhs. You will have to pay an exit load of 1% on ₹1.3 Lakhs, which comes up to ₹1,300. This exit load will be deducted from the redemption value, which is ₹1.3 Lakhs and the balance will be paid out to you.
The example that you saw above would hold in the case of a lump sum investment in mutual funds. But what if you’ve invested in a mutual fund through a SIP? How would the exit load be calculated then? While there would be a slight change in the calculation, the general idea would still remain the same.
In the case of a SIP investment, the exit load would be charged only on the units that have not crossed the period specified by the fund house. For instance, if 200 units have crossed the 6-month period, whereas 400 units have not, then the exit load will be levied only on the value of the 400 units at the time of redemption.
With this, you now know what the exit load is in mutual funds. The next time you’re looking for funds to invest in, remember to choose one that either charges no exit load or minimal exit load. This will ensure that you don’t lose out on the profits that you’ve managed to generate during the period of holding. Moreover, you can also check out other ways of investing too, like subscribing to the upcoming IPOs, for which you will require to open a demat account. Visit Motilal Oswal today to open an account if you don’t have one already. All it takes is a few minutes of your time.