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De-jargoned: Exit load in mutual funds

LiveMint logoLiveMint 09-04-2017 Kayezad E. Adajania

Sometimes, when you sell mutual funds, you pay a small penalty. It’s called the exit load. A majority of mutual fund schemes impose exit loads, though there are some that come without any. Before we go any further, remember: a fund with no exit load is not necessarily better than the one that doesn’t. Its presence or absence has got nothing to do with the scheme’s pedigree. That said, it’s important to understand why exit loads exist.

Primarily, exit loads are imposed to discourage premature withdrawals. Funds managers who manage schemes meant for the long run would like to their investors to stay invested for long tenures.

This is desirable because if too many investors exit, the fund manager has to sell shares—in distress—of companies that are liquid but generally well-managed, thereby robbing existing investors of their future growth potential. Hence, the fund imposes an exit load to discourage investors from moving out too soon.

Sometimes, funds have a flat exit load. Other times, it has a tiered structure; higher loads for early withdrawals and then the longer you stay invested, the exit load goes down, till it vanishes after a point.

According to Value Research, UTI Gilt Advantage Long Term Plan has a 2% exit load if you withdraw within 548 days and then 1% load if you withdraw before 1,095 days.

Debt funds that follow an accrual strategy have higher exit loads as this strategy calls for patience in investing. Franklin India Corporate Bond Opportunities Fund does not charge any exit load if you withdraw up to 10% of your units, per year. For units in excess of this limit, it charges 3% for withdrawals before 12 months, 2% for withdrawals before 24 months, 1% for withdrawals before 36 months and nil after that. Equity funds, typically, have an exit load that is valid till a year after you invest.

Before 2012, the AMCs used to collect exit loads and use them for sales and marketing activities. Existing investors, in fact, lost out from other investors’ premature withdrawals if they were large. In 2012, the capital market regulator, Securities and Exchange Board of India (Sebi) mandated that exit loads should go back to the respective schemes.

Sebi said this to protect existing investors from those who withdraw the amount prematurely. However, in lieu of the loss that AMCs incurred from not being allowed to pocket the exit loads, Sebi allowed fund houses to charge an additional 20 basis points to every scheme.

Quite a few schemes charge these 20 basis points despite not charging an exit load. One such fund house’s chief told us that since the fund house incurs cost in acquiring the customers, it is justified in charging.

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