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Exit load in mutual funds

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    Mutual funds are one of the best investment options in India.  They don’t require any specific expertise or extensive financial knowledge on your end as you can hire expert fund managers to take care of your fund. If you are looking to invest in mutual funds, you should know the entry and exit load of your investment to calculate their returns and to make informed decisions. 

    People looking to diversify their investments should invest in mutual funds as an added cushion to their other savings.  

     

    What are Mutual Funds?

    It’s good to start from the basics!  we have specific in-depth article you can find it here

    Mutual funds are a collection of investments from various investors. Financial experts or managers are hired to manage the funds and generate returns for them. The services provided by the fund managers don’t come for free but at a fee!  

    This fees can be in the form of fund entry fee and exit load fee. The collected capital is then invested in company shares, stocks and bonds and managed to produce the highest possible returns. 

    Exit load and entry load are important aspects of mutual funds. A thorough knowledge of them would help you understand the system and working of mutual funds better. 

    What is Mutual Fund Entry Load?

    Mutual fund entry fee is the typical percentage of fee that an investor pays on the purchase of a mutual fund scheme. It is also known as the entry load.  

    The entry-level fee is usually deducted from the investor’s initial investment which reduces the total amount of investment. For instance, the percentage of the entry-load will be deducted from the total amount and only the rest of the money would be invested in the scheme. 

    However, the mutual fund entry load no longer exists. Since 1st of August 2009, the entry-load was banned from the mutual fund investment system. Investors no longer have to pay the entry-level fee, and the whole investment amount will be invested in the scheme.  

    Well, that’s good news for you as an aspiring investor! 

    Earlier, the purchase of mutual funds involved an entry load charged at 2.25% of the total amount. This was the commission you had to pay to the distributors.  

    Now you don’t have to pay the entry load, but you may have to pay transaction fees to the distributors based on the nature of your investments. The distributors may follow a specific fee structure to charge for their services. 

    What Does Exit Load in a Mutual Fund Scheme Mean?

    The mutual fund exit-load is the fee that the investors have to pay when they want to exit or redeem their mutual fund investment before its maturity. Many a time, what happens is that you may feel that you cannot keep your investments to the lock-in period and withdraw them before the due date. This when exit load comes to the picture! 

    The exit-load serves many purposes.  

    – First, it discourages investors to withdraw before the lock-in period as the exist-load can reduce the amount they were about to receive at the time of maturity.  

    – Secondly, the exit-load also serves as a penalty or compensation for not honoring the agreed time period of investment you as an investor had committed to initially. 

    But not all kinds of mutual funds levy an exit charge. Therefore, you should consider the exit load ratio when choosing a mutual fund scheme for investment. It should be noted that the exit load may vary from scheme to scheme and isn’t a core part of the mutual funds itself. 

    The exit load fee may affect the number of withdrawals from the mutual fund schemes. Also, the amount you will receive on premature withdrawal will be less than the actual amount you would have got on the completion of the maturity period. 

    How is Exit-Load Calculated?

    As a potent investor, most of you would not have gotten the idea of mutual fund exit load. It is not as complicated as it sounds! It is the matter of knowing the details of the scheme that’s all.  

    Exit load is charged as a small percentage of NAV – Net Asset Value – at the time of purchase of the mutual fund. When you withdraw your investment before the maturity period, you pay the exit load in return. Simple as it is! 

    let’s look at the example:)

    Suppose you had purchased 500 units of an equity scheme for a year, but you now want to withdraw or sell it, say six months before the due date. The exit load charge is 1% on the units if you exit before time.  

    Suppose the NAV on the investment is 100 INR. After an exit load deduction of 1%, you will receive 99 INR per unit on redemption. The total amount you would have received on the maturity is 50,000 INR (100 INR x 500 units). On premature withdrawal, the total amount you will now receive will be 49, 500 INR (99 INR x 500 units).  

    Knowing About Exit-Load is Important!

    As an investor, it is important that you understand how the exit load works. It will help you understand the returns after all the expenses. You can make better investments and be aware of all the returns you are entitled to. Doing a research will make all the difference in your investment and improve your knowledge about your returns from it. 

    For example, people who invest through the SIP – Systematic Investment Plan – may believe that they don’t have to pay the exit load, but they have to anyway! The exit load of the investment is for every installment of the SIP. The only SIP installment that will not be charged with an exit load fee is if it has completed its maturity date. 

    Why You Should Invest in Mutual Funds?

    Mutual funds are a great way of investing money, especially for retail investors. Based on your individual requirement, you can choose from different mutual fund schemes. The assets are managed by professional asset management companies (AMCs). The fund managers appointed by the company will handle your funds for you and help you earn good returns. In exchange for their service, they charge you a fee. 

    One of the benefits of the mutual fund is that you can make diversified investment thus diluting the risk factors. This makes mutual funds less risky than stocks.  

    Investors have the option of buying units of a diversified equity fund with a low investment, as low as 5,000 INR only. The investment amount can go lower even. As an investor, you have plenty of choices when it comes to investment and withdrawal of your funds. The returns on mutual funds are also very attractive making it the to-go option for potent investors. 

    The Bottom-Line

    Mutual funds are a great way to invest money and increase your investments. They are flexible, beneficial and they are for everyone! Knowing about the basics like the entry and exit load can help you understand your investments better and also assist you in making better financial decisions in the future.