Mutual funds are no new game for a well-informed audience of this country. They are a pool of funds or stocks which are professionally managed by a group of experts who offer their knowledge and expertise in the investment field. It is because of their efforts and skills that excellent returns are generated for the investors. But this skill set does not come free. There is a particular charge or fee for it called Load. There are some Asset Management Companies which charge you if you exit or redeem units of a fund under their management. Let us understand this better;
While considering all the charges that come along while buying a fund, exit load is one important fee that needs to be looked-through before investing. Most of the Asset management companies charge the investors if they happen to exit a fund or redeem its units before the lock-in period is over. They may also be referred to as an early-exit penalty or a commission fee to the fund house. It is not necessary that all funds charge an exit-load but there are a lot of them which do. Hence, it is important to go through all the details before making the final investment since exit load or exit-fee is not a part of your expense ratio.
Exit load is not just a fee, it can be viewed as an obligation on the investor to keep that scheme going till the maturity in order to avoid any extra charges. This results in comparatively lesser withdrawals as compared to open-ended schemes. While in open-ended schemes, the investor can withdraw or redeem the unit as and when required, an exit load discourages the investors to make an untimely or premature withdrawal.
EXIT LOAD IN MUTUAL FUNDS
Mutual funds have a Net Asset Value which is the fund’s market price per unit. The exit load is a part of the NAV of funds in percentage form held by the investors. Upon exit load deduction, the rest of the amount is credited in the investor’s account.
Let us understand this with the help of an example,
Let us say you have invested in a fund with NAV = Rs. 50. The fund has an exit charge for a 1-year scheme at the rate of 2%. So, if you happen to withdraw or redeem your units form that particular fund within say 4 months, then you will be charged an exit-load of @% on the Nav i.e. Rs. 50 which will be Re. 1. Hence, Re. 1 would be deducted and Rs. 49 gets credited to your account.
If you do not redeem the units before the lock-in period and redeem them on maturity, no exit-load needs to be paid.
CALCULATING THE EXIT LOAD
Calculating the exit largely depends on your fund manager. It is important to choose a fund manager with a good rapport in the market. Let us say, you have invested Rs. 5000 in a scheme in March 2018 with NAV =Rs. 100 and exit-load being charged at the rate 1%. In the coming month of July, you happen to make another investment of Rs. 10000 in a scheme with NAV of Rs. 100 with exit-load being changed at 1%. If you choose to redeem the units in December 2018, while the NAV is Rs. 120, what will be the exit load being charged?
Here is a simple calculation to understand this;
Exit load is charged at the rate 1%, hence,
1% of [(50 * 120) + (100*120)] = 180
50 is the number of units bought in March 2018 and 100 is the number of units bought in July 2018.
Hence, the total amount credited to your account would be:
Rs. (18,000- 180) = Rs. 17,820.
Similarly, the exit load on other funds can be calculated using the same mathematics.
Thus, it is very important to understand the complete mathematics of your funds and make the investments carefully. An amount which may not seem quite high in one point of time might prove to be a blessing if kept invested in the long term. For the best advice and complete transparency in investing, chose www.piggy.co.in .
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