The Impact of Entry and Exit Loads on Mutual Fund Investments
Posted on 09-Dec-2024
6 min read
Understand the role of entry and exit loads in mutual funds. Learn how these fees work and their impact on your investment portfolio. Read to know more.
Table of Content
Investing in mutual funds is a popular method for long-term wealth accumulation. Before investing, it is essential to grasp the associated costs affecting investment returns. Asset Management Companies typically charge fees when investors enter or exit schemes.
An entry load applies when buying units, while an exit load is charged upon redemption. These fees cover administrative and operational expenses. This blog post by Shriram AMC explores these concepts, outlining their impact on investors' financial strategies. Understanding these charges is crucial for making informed investment decisions in mutual funds.
Let’s take a closer look at the purpose of an exit load and the factors that determine it below:
Let us assume you have invested in 4000 units of Shriram Balanced Advantage Fund. If you choose to redeem 500 units (which represents more than 12% of your total investment) two months after purchasing them, and the Net Asset Value (NAV) is ₹100, you will incur an exit load calculated as follows:
Total Units bought: 4000 units
Units Redeemed: 500 units
NAV at the time of investment: ₹100
Amount invested: ₹100 * 500 = ₹50,000
NAV at the time of selling: ₹100
Exit load: 1% of (₹50,000) = ₹500
Final redemption amount: ₹50,000 - ₹500 = ₹49,500
Here are the main reasons why mutual funds have an exit load:
An entry load applies when buying units, while an exit load is charged upon redemption. These fees cover administrative and operational expenses. This blog post by Shriram AMC explores these concepts, outlining their impact on investors' financial strategies. Understanding these charges is crucial for making informed investment decisions in mutual funds.
What is a Mutual Fund Exit Load?
A mutual fund exit load is a fee charged by the fund when you sell or redeem your units before a specified period. This fee is typically a percentage of the amount being redeemed and is designed to discourage short-term trading, which can disrupt the fund's management. The exit load varies depending on the type of mutual fund and the holding period of the investment.Let’s take a closer look at the purpose of an exit load and the factors that determine it below:
- Purpose: The exit load is intended to prevent investors from making frequent withdrawals and to ensure that those who remain invested for the long term are not adversely affected by the actions of short-term traders.
- Variation: Different funds have different exit loads. For example, equity funds might have a higher exit load compared to debt funds.
- Time Frame: The exit load generally applies if the investment is redeemed within a short period, typically ranging from a few months to a couple of years.
How to Calculate Exit Load
Different mutual funds have varying exit load rates, which depend on the type of fund. For example, a scheme imposes a 1% exit load on redemptions of more made within 90 days of purchase.Let us assume you have invested in 4000 units of Shriram Balanced Advantage Fund. If you choose to redeem 500 units (which represents more than 12% of your total investment) two months after purchasing them, and the Net Asset Value (NAV) is ₹100, you will incur an exit load calculated as follows:
Total Units bought: 4000 units
Units Redeemed: 500 units
NAV at the time of investment: ₹100
Amount invested: ₹100 * 500 = ₹50,000
NAV at the time of selling: ₹100
Exit load: 1% of (₹50,000) = ₹500
Final redemption amount: ₹50,000 - ₹500 = ₹49,500
Why Do Mutual Funds Have an Exit Load?
Mutual funds impose an exit load for several reasons, primarily to maintain the fund's stability and protect long-term investors' interests.Here are the main reasons why mutual funds have an exit load:
- Discourage Short-Term Trading: Exit loads are designed to discourage investors from frequent buying and selling, which can lead to market volatility and disrupt the fund's investment strategy.
- Protect Long-Term Investors: By discouraging short-term trading, exit loads help protect the interests of long-term investors who remain committed to the fund.
- Cover Administrative Costs: The costs associated with frequent transactions can be substantial. Exit loads help cover these administrative costs, ensuring that the fund's resources are utilised efficiently.
- Stabilise Fund Performance: Frequent redemptions can force fund managers to liquidate assets at unfavourable times, potentially affecting the fund's overall performance. Exit loads help maintain stability by encouraging investors to stay invested longer.
Strategies for Managing Exit Loads
Managing exit loads effectively can help investors maximise their returns. Here are some strategies to consider:1. Understand the Exit Load Structure
Before investing in a mutual fund, carefully review the exit load structure. Different funds have varying exit load periods and rates. Understanding these details will help you plan your investment and redemption strategies.2. Plan Your Investment Horizon
Invest with a clear understanding of your investment horizon. If you need funds in the short term, consider investing in funds with lower or no exit loads. Long-term investments typically benefit more from equity funds, which may have exit loads but offer higher returns over time.3. Avoid Frequent Trading
Frequent trading can erode your returns due to exit loads and transaction costs. Adopt a buy-and-hold strategy, focusing on the long-term growth potential of your investments rather than short-term market fluctuations.4. Utilise Systematic Withdrawal Plans (SWPs)
Systematic Withdrawal Plans (SWP) allow you to redeem a fixed amount from your mutual fund at regular intervals. This can help manage exit loads by spreading out redemptions over time, potentially reducing the overall impact of exit fees.5. Choose Funds with Low or No Exit Loads
Some mutual funds offer low or no exit loads, especially those designed for short-term investments. Consider these options if you need more flexibility with your investment duration.6. Monitor Fund Performance
Regularly review the performance of your mutual funds. If a fund consistently underperforms, it might be worth exiting even with an exit load, as staying invested in a poor-performing fund could result in greater losses over time.Exit Loads on Different Types of Mutual Funds
Different types of mutual funds have varying exit load structures. Here is an overview of exit loads for some common types of mutual funds:1. Equity Funds
Equity funds often have higher exit loads, especially if redeemed very soon. This is to encourage long-term investment.2. Debt Funds
Debt funds typically have lower exit loads compared to equity funds. Some debt funds may not have any exit load if the holding period is short.3. Hybrid Funds
Hybrid funds, which invest in both equity and debt, have exit loads that vary depending on the fund's composition and investment strategy.4. Liquid Funds
Liquid funds, designed for short-term investments, usually have minimal or no exit loads, making them suitable for parking surplus cash.Conclusion
Understanding mutual fund exit loads is crucial for making informed investment decisions. While exit loads remain an important consideration for investors. By understanding why exit loads exist, how they are calculated, and strategies for managing them, you can optimise your mutual fund investments. This knowledge will enable you to maximise your returns and achieve your financial goals.FAQs
Here are some frequently asked questions about exit loads in mutual funds:Do all mutual funds have an exit load?
No, not all mutual funds have an exit load. It depends on the fund's terms and the investment duration. However, redeeming your units before a specified term may attract some exit load. Always remember to check the fund details for information about exit load, expense ratio, etc.How is the exit load calculated?
The exit load is calculated as a percentage of the redemption amount. For example, a 1*% exit load on ₹10,000 would cost ₹100.How can investors avoid paying exit loads?
Investors can avoid exit loads by holding mutual fund units for the minimum required period specified by the fund.Are exit loads applicable to Systematic Investment Plans (SIPs)?
Yes, exit loads can apply to SIPs if the units are redeemed before the specified period for each instalment.
Was this article helpful?
Registered Successfully
Your Feedback Saved Successfully
Previous
Explore Shriram Mutual fund
Shriram Flexi Cap Fund
Invest nowShriram ELSS Tax Saver Fund
Invest nowShriram Aggressive Hybrid Fund
Invest nowShriram Balanced Advantage Fund
Invest nowShriram Overnight Fund
Invest nowShriram Multi Asset Allocation Fund
Invest nowLove our blog posts?
Subscribe to get updates directly to your e-mail inbox
-Investing-in-Mutual-Funds-for-a-Steady-Income.png)
