Selling mutual fund units early can be costly. Know the exit load before redeeming

There is a cost that you have to pay if you invest in a mutual fund and sell it before a specified holding period. This is called the exit load, which is levied on most equity mutual funds if your holding period is less than a year.

Let's understand the impact of exit load on your investments and financial future in detail:

Exit load is a charge imposed by mutual fund asset management companies (AMCs) when investors redeem their units before a specified holding period. Although the fee charged is typically a very small percentage of the redemption amount, the AMCs impose this cost to discourage early withdrawals.

Mutual funds are designed for long-term investments, not for short-term trading. Exit load helps by discouraging frequent withdrawals, which can impact the fund's performance and liquidity.

Exit load also helps the fund manager in managing the cash flows and redemptions effectively.

What is the exit load amount?

The exit load for most of the equity mutual funds is 1%, and it usually applies in case of redemptions within one year of investments. The exit load is deducted from the redemption amount.

No exit load applies when an investor completes the specified holding period.

However, debt funds and liquid funds generally have lower or no exit loads. Hybrid funds have an exit load structure similar to equity and debt mutual funds based on their asset allocation.

ELSS funds do not have exit loads as they come with a mandatory lock-in of 3 years.

How is it calculated for lump sum and SIP?

Suppose your investment in a fund has grown from ₹40,000 to ₹50,000 in 6 months, and its exit load is 1% on redemption before 1 year. In this case, if you decide to redeem, then 1% of ₹50,000, i.e., ₹500, will be deducted by the fund house, and the amount in your hand will be ₹49,500.

In case of SIP, however, the exit load calculation is a bit tricky. It's calculated basis of the investment tenure of the units to be redeemed.

Exit loads are not uniform across all mutual funds. It is specified in the scheme information document (SID) of a fund and often differs from one fund to another. You should therefore read the SID before exiting a fund.