Exit load
Also written Redemption load · Load · Exit load (PMS)
A charge levied when an investor redeems units, calculated as a percentage of NAV and deducted from it, usually only if the units are sold within a stated holding period.
In plain language
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.
How it works
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.
A worked example
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.
| Rs | |
|---|---|
| NAV per unit | 52.00 |
| Exit load at 1% | 0.52 |
| Redemption price per unit | 51.48 |
| Units redeemed | 4,424.779 |
| Amount received | 2,27,787.61 |
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.
Why NISM asks about it
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.
Common exam traps
- 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.
Where this is taught
- Series XII · Chapter 5: Mutual Fundsintroduced here
- Series XIX-B · Chapter 3: Introduction to Category III AIF Ecosystemintroduced here
- Series XXI-B · Chapter 7: Role of Portfolio Managersintroduced here
- Series XXI-A · Chapter 7: Role of Portfolio Managersintroduced here
- Series V-A · Chapter 7: Net Asset Value, Total Expense Ratio and Pricing of unitsintroduced here
- Series II-B · Chapter 14: Financial Transactionsintroduced here
- Series V-D · Chapter 7: Net Asset Value, Total Expense Ratio and Pricing of unitsintroduced here
- Series XIX-C · Chapter 7: Alternative Investment Funds Ecosystemintroduced here
- Series XIX-E · Chapter 5: Alternative Investment Fund Ecosystemintroduced here
- Series XXI-B · Chapter 8: Operational Aspects of Portfolio Managers
- Series XXI-A · Chapter 8: Operational Aspects of Portfolio Managers
Related terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- SwitchA single mutual fund transaction that redeems units from one scheme (or option) and invests the proceeds in another on the same date — a redemption and a purchase rolled into one.
- Systematic Transfer PlanA standing instruction to move a fixed amount from one scheme into another of the same mutual fund at a set frequency — a withdrawal plan out of the source and a SIP into the target.
- Total Expense RatioThe all-in annual cost of a mutual fund scheme as a percentage of daily net assets — the base expense ratio plus brokerage, transaction cost and statutory levies — charged to the scheme, not billed to the investor.
- Unit capitalThe number of units a mutual fund scheme has issued multiplied by their face value — an accounting figure that records what investors contributed, not what their holding is worth today.
- Redemption GateA limit, set by the manager in the PPM, on the maximum amount investors can redeem from a Category III AIF in each redemption period — over and above expenses, taxes and exit load.
- Entry loadThe former mark-up of a mutual fund's sale price over NAV, charged when an investor bought units. SEBI has banned it, so units are now sold at NAV, subject only to stamp duty.
- Stamp dutyA levy on mutual fund units from 1 July 2020: 0.005% of the amount invested on every issue of units — lump sum, SIP, STP, switch-in, IDCW reinvestment — and 0.015% on transfers.
- Scheme performance dashboardThe dashboard every AMC must publish on its website and update regularly, showing how each scheme has performed over various holding periods alongside its category, fund manager, benchmark, TER and portfolio.
- Compounded returnThe single yearly rate at which an investment's starting value would have to grow, each year's growth earned on the year before, to reach its ending value over a stated number of years.
- Change in control of the AMCWhen ownership of a mutual fund's AMC changes hands, SEBI and the trustees must approve it first and every unit holder must be offered at least 30 calendar days to exit at NAV with no exit load.
- Pass-through vehicleThe structural fact that a mutual fund passes the risks and returns of its portfolio straight to unitholders, keeping nothing and promising nothing — which is why it is taxed once and cannot guarantee a return.
- Fund factsheetThe monthly scheme summary an AMC publishes voluntarily — portfolio, performance, risk measures and investment details in one document. It is an AMFI best practice, not a statutory requirement.
- Instant Access FacilityA facility that credits redemption proceeds to a resident individual investor's bank account on the same day, offered only in overnight and liquid schemes and only through the AMC's own website or app.
- Transaction slipThe short form an existing investor uses instead of a full application — it carries the folio number, so the registrar can process a purchase, redemption, switch or profile change without re-keying the investor.
- Open-ended fundA mutual fund scheme with no maturity date that keeps selling and redeeming units directly after its NFO, at NAV-linked prices, so its number of units and unit capital change every day.
- Open-ended AIFAn AIF scheme that offers units continuously with no fixed maturity and lets investors redeem at set intervals — permitted only for Category III AIFs, with a variable corpus.
- Closed-ended AIFAn AIF scheme offered for a limited period, funded by commitments drawn down through capital calls, with no redemption before the fund winds up — compulsory for Categories I and II.
- Suspension of redemptionsAn open-ended Category III AIF halting redemptions in exceptional circumstances, justified only in investors' best interest or by SEBI — with no new subscriptions accepted while it lasts.
- Life Cycle FundAn open-ended scheme with a target maturity date between 5 and 30 years, which follows a glide path across equity, debt and other assets — shifting away from equity as maturity approaches.
- Scheme Information DocumentThe offer document setting out everything about a particular scheme that a prospective investor ought to know before investing — prepared in SEBI's format, vetted but not approved by SEBI.
- Fundamental attributesThe core features of a scheme — its investment objectives, policies and terms — on which investors relied when they invested. Changing them requires notice to every unit-holder and a no-load exit at NAV.
- AddendumA notice issued to record an interim change to a scheme's SID, SAI or KIM before those documents are next updated. It is part of the scheme related documents and must accompany the KIM.
- TriggerA standing instruction that automatically redeems or switches units when a market level, NAV, date or percentage change is reached — a one-time facility that ends once it has fired.
- Recurring expensesThe ongoing fees and commissions a mutual fund scheme pays its constituents, charged as a percentage of AUM and deducted before NAV is struck — so higher recurring expenses mean lower investor returns.
- Simple returnThe plain percentage change in the value of an investment over a period — (ending value minus beginning value) divided by beginning value — with no adjustment for time or compounding.
- Investment approachA broad outlay of the securities and permissible instruments a portfolio manager will invest in for a client, set out in the PMS agreement and tagged to exactly one strategy.
- Online Dispute ResolutionThe MII-administered process — pre-conciliation, conciliation, then arbitration — through which investor disputes with portfolio managers are resolved online via the SMART ODR portal.
- Upfront feeA fee charged at the time of investing. Portfolio managers may not charge upfront fees to clients, directly or indirectly — so the full amount invested starts working from day one.
- Gross returnThe total return on an investment before deducting any fees, expenses or commissions. Useful for broad evaluation, but misleading as a measure of what the investor actually earns.
- Lock-inA minimum holding period before withdrawal, expressly barred in PMS: a portfolio manager cannot force a client to keep funds invested, though a graded exit load may still apply.