Exit load in mutual fund

 

Sometimes when you buy a mutual fund, you pay a small penalty at the same time. This is called an exit load. The majority of mutual fund schemes impose an exit load, although there are some that come without an exit load. Before we go ahead, remember that a fund with no exit load is no better than a fund with an exit load. Whether the exit load is imposed or not has nothing to do with the pedigree of the scheme. It is important to understand why exhaust loads are present.

 

Why put an exit load

 

Exit loads are mainly applied to discourage premature withdrawal in the mutual fund. Fund managers responsible for long-term plans will want their investors to invest in the fund for a long time. This is desirable because if too many investors exit together, the fund manager has to sell the shares in distress, to companies that are liquid, but usually mismanaged, robbing existing investors of their future growth potential. Does matter. Therefore, the fund has to put an exit load in a fund to discourage investors from exiting soon.

 

various types

 

Sometimes the fund has a flat exit load. In a second way, they have a structure; The high load for the initial withdrawal and then you stay invested for a long time until the exhaust load goes down until it disappears after a period. Debt funds that follow a contingency strategy have higher exit load than other types of funds because this strategy calls for patience in investing. If you withdraw up to 10% of your units per year, the Franklin India Credit Risk Fund does not carry any exit load. For units exceeding this limit, it charges 3% for withdrawals before 12 months, 2% for withdrawals before 24 months, 1% for withdrawals before 36 months, and zero thereafter. Equity funds usually have an exit load that is valid for one year after you invest.

 

The machinations

 

Prior to 2012, AMCs used to collect exhaust loads and used for sales and marketing activities. Existing investors, however, will have to lose due to premature withdrawals from other investors, especially when they were of large size. But in 2012, the capital markets regulator, the Securities and Exchange Board of India (SEBI), said the exit load should go back to related schemes. The goal here was to protect existing investors from prematurely withdrawing funds. SEBI allowed fund houses to charge an additional 20 basis points in each scheme, in lieu of losses due to AMC not pocketing the exit load. However, in June 2018, SEBI ordered AMC to increase spending from 20 basis points to 5 basis points. This was done to reduce the cost of investing in mutual funds.