Not known to many or either unnoticed by the investor, there are several times when you face penalty or charges while withdrawing or selling your mutual fund. The financial term for the same is called the Exit Load. Not every Mutual Funds comes with Exit loads but majority of them do come with it. So you must take note of such exit loads while you wish to withdraw your MF.
Reasons for levying Exit loads
The Exit Loads are kept according to when you withdraw your money.This is done to discourage withdrawal of Mutual funds prematurely. In turn encourages investing in Long term. The mention of Exit load and its percentage can be seen in MF scheme. The major reasons for imposing Exit load penalties is that not many investors would exit the funds invested in, hampering the company’s growth potential.
Types of Exit Load
In simple words, Exit Loads varies according to time i.e. it has tiered structure wherein if you withdraw at an early stage, you might have to pay more Exit loads while if you stay for longer run, eventually Exit loads will not be there. For some of the Mutual Funds there is a flat Exit load rate.
E.g. of Flat Mutual Fund Exit Load:-
Franklin India Low Duration Fund, which is a short term MF, has clearly stated in their scheme that if redeemed between 0-3 months, then Exit Load penalty would be 0.5%.
E.g. of Tiered Structure Mutual Fund Exit Load:-
In the Equity Multi Cap category, Franklin India High Growth companies Fundhave Exit Load rate of 1% if redeemed anytime between 0-2 years. Redemption done after 2 years will hold 0% Exit Load.
Usually all the Equity Fund Schemes have Exit load penalties for a year and after that, there is nil charged upon withdrawal. As against, the Debt Funds have highest exit Load penalties which after a couple of years tends to be nil.Pages like https://www.upwardly.in/mutual-fund-lumpsum-calculator gives you an overall idea on the exit load penalties.
Few years back in 2012, the Exit load penalties were used by the AMCs for the purpose of Marketing but the existing investors were losing out more money from the premature withdrawal when they were huge in numbers. To chuck out the issue, Securities exchange Board of India (SEBI) made it compulsory in 2012 to have Exit load penalties given back to the particular Mutual fund schemes.
The step was taken out by SEBI to protect all the current investors from those who withdrew their MF prematurely. With this SEBI also let the fund house to levy extra 20 basis points on each scheme to cover up the loss incurred by them on not getting the Exit Loads penalties. But there are certain Mutual fund schemes, which do not have any Exit Load penalties but charges additional basis points of 20. It is because there is a cost attached with acquisition of customers with these schemes for which they charge those 20 basis points.