Synopsis

Most investors don’t get the concept of exit load right when they have invested regularly in a scheme via a monthly Systematic Investment Plan (SIP).

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You have recently sold some of your mutual fund investments. When you saw the redemption amount in the bank account, you have noticed that the amount is a little less than what you have expected. Where did the money go?

Well, most probably it went towards an exit load. Mutual funds charge an exit load on redemptions before a stipulated period. Mutual funds typically levy exit load to discourage investors from hopping in and out of schemes.

Different mutual fund schemes have different periods in which they levy exit loads. The information would be available in the scheme information document or SID.

Exit load is typically charged as a small per cent of the Net Asset Value prevailing at the time when you sell your schemes.

How is it calculated?

Suppose, you are selling today 500 units of an equity scheme you had purchased four months ago. The scheme charges an exit load of 1 per cent if you redeem the units before one year.

Let us assume the NAV is Rs 100. You will get Rs 99 per unit [Rs 100 – Rs 1 (1 per cent of 100)] on redemption. The total amount which you will get will be Rs 49,500 (Rs 99 X 500 units). That means you have paid an exit load of Rs 500 (Rs 1 per unit).

How does it work in an SIP?

Most investors don’t get the concept of exit load right when they have invested regularly in a scheme via a monthly Systematic Investment Plan (SIP). They believe that if they have started an SIP a year ago, they don’t have to pay an exit load if they sell investment after the stipulated time, say, one year. However, this is an erroneous notion.

The holding period is applicable for every instalment of SIP. For example, if the exit load is charged on redemptions before a year, that is applicable to every SIP instalment. If your first SIP instalment has completed a year, only that instalment would not be charged an exit load on redemption. All other instalments which are held for less than a year would attract exit load on sale.

Let us work with an example. Assume that you have invested via an SIP in a mutual fund scheme from January to June, 2015. You sold the scheme on 10 th March, 2016 at an NAV of Rs 110. The scheme charges an exit load of 1 percent if the units are withdrawn before a year. How much exit load would you pay? (See the table below)

ExitET Online

Number of units more than one year old: 55 (Purchased in Jan-Mar, 2015) - Exit Load not applicable
Number of units less than one year old: 60 (Purchased in Apr-Jun, 2015) - Exit load applicable
Exit load payable: Rs 110 NAV X 0.01 (One per cent of NAV at redemption) X 60 units (Units redeemed in less than 1 year) =Rs 66
Amount you get on redemption of 115 units: Rs 12,584 [(Rs 110 NAV X 115 units) – (Rs 66 Exit load applicable)]

( Originally published on Dec 14, 2016 )

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