Exit load is the fee charged by mutual funds when an investor sells or redeems mutual fund units before a certain period of time. This is mostly charged by AMCs in case the redemption is done within a year. Few funds charge it even if the redemption is done in 2 or 3 years.
How is exit load calculated?
Exit load is calculated on market value of investment. To explain this with example – Let’s consider a mutual fund has exit load of 1% if the redemption is done within a year. Let’s consider 2 investors, Investor A and Investor B who have invested ₹ 1 lakh each in this mutual fund scheme. Profit of investor A is 10 percent and loss for investor B is 10 percent.
Exit load calculation for investor A if redemption is done within a year
Investor A is on a profit of 10 percent. Amount invested is ₹ 1 lakh and with 10 percent profit, market value of investment is ₹ 1,10,000. The exit load in this case will be 1 percent of ₹ 1,10,000 which is ₹ 1100.
Exit load calculation for investor B if redemption is done within a year
Investor B is in a loss of 10 percent. Amount invested is ₹ 1 lakh and with 10 percent loss, market value of investment is ₹ 90,000. The exit load in this case will be 1 percent of ₹ 90,000 which is ₹ 900.
As understood from the above example, exit load is charged even in case redemption is done with loss.
So, the question here is if exit load should be one of the important factor for selection of mutual fund?
As suggested by many experts, equity mutual fund investments should be done at least for 5 years. There is no fund having exit load if the holding period is 5 years or more. So, exit load should not be an important parameter if the investment is done for long term.