Exit load

A mutual fund is meant to be held. When an investor sells out early, the fund manager has to raise cash — often by selling securities at a moment not of his choosing — and the cost of that falls on everybody still invested.

An exit load is the charge that puts the cost back where it belongs. It is deducted when you leave, it is expressed as a percentage of the NAV, and it is almost always linked to how long you held the units.

The symmetrical charge on the way in no longer exists: entry loads are prohibited by SEBI. Loads are now a one-way door.

The load is applied to the NAV to arrive at the price you actually receive:

Redemption price = NAV × (1 − exit load rate)

So on a NAV of Rs 12 with a 1 per cent exit load, the load is 1 per cent of Rs 12 = Rs 0.12, and the investor receives Rs 11.88 a unit.

The holding-period condition is what makes it avoidable. A typical structure is 1 per cent if redeemed within 1 year of the date of purchase, nil thereafter. The clock runs from the date of purchase of those particular units, which matters enormously for a SIP: each instalment carries its own date, so a 36-month SIP redeemed in one go will have some instalments inside the load period and some outside.

An exit load is not the same charge as the ongoing expenses. Fund running expenses are charged daily as a percentage of average net assets, are already reflected in the NAV, and are summarised as the Total Expense Ratio — the investor never pays them separately. The exit load is a discrete, one-off deduction at redemption. The scheme's applicable exit load is disclosed in the fund factsheet along with the objective, category, AUM, benchmark and riskometer.

The same deduction applies to any transaction that is a redemption in substance — a Systematic Withdrawal Plan, the source leg of a Systematic Transfer Plan, and a switch out of a scheme are all NAV-adjusted for exit load where one applies.

Priya invests Rs 2,00,000 in an equity fund at a NAV of Rs 45.20.

Units allotted = 2,00,000 ÷ 45.20 = 4,424.779 units

The scheme charges 1 per cent exit load if redeemed within 1 year. Eight months later the NAV is Rs 52.00 and she redeems the whole holding.

Had she waited past the twelve-month mark — assuming the same NAV — she would have received 4,424.779 × Rs 52.00 = Rs 2,30,088.50.

Cost of leaving four months early: Rs 2,300.89.

The workbook's own smaller case runs the same way: 500 units at a NAV of Rs 24 with a 1 per cent exit load gives a redemption price of 24 × (1 − 0.01) = Rs 23.76, and a redemption amount of 500 × 23.76 = Rs 11,880 rather than Rs 12,000.

Chapter 5, section 5.2 under "Loads", with the arithmetic repeated in section 5.6 on redemption transactions and referenced again in the fund factsheet contents. This is one of the most reliably examined calculations in the paper because it is a single multiplication with an unambiguous answer. Expect: "NAV is Rs X, exit load is Y per cent, what does the investor receive per unit / in total?"; a conceptual question on whether entry loads are permitted (they are not); and a distinction question separating exit load from the Total Expense Ratio.

• The load is a percentage of NAV, not of your original investment and not of your gain. On a NAV of Rs 52, a 1 per cent load is Rs 0.52 — whatever you paid to get in.
• Entry loads are prohibited. Any option describing a charge deducted at the time of purchase is wrong.
• Exit load is not the expense ratio. TER is charged daily against average net assets and is already inside the NAV you see; the exit load is deducted from that NAV at redemption. Both exist; they are not alternatives.
• The holding-period clock runs from the date of purchase of those units, not from the date you first opened the folio. This is where SIP redemptions are misanswered.
• The exit-load period and the tax holding period are different rules from different rulebooks. They often look similar and they are not linked; answer the one the question asks about.
• Switches and STPs trigger exit load on the source scheme. A switch is a redemption and a purchase rolled into one transaction, and the redemption leg is loaded like any other.