Assume that you have invested Rs 1 lakh in a mutual fund scheme. Now, after some time, you need money for an emergency. You redeem your investment thinking that you will get your money back. However, you find that there is a little reduction in it. Why? This is where a mutual fund exit load comes into the picture.
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What Is An Exit Load In Mutual Funds?
An exit load is a fee charged by a mutual fund to investors when you redeem your units prior to a certain period. It is used to discourage investors from making early withdrawals. However, not all mutual funds impose exit loads.
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How Much Could You Lose?
Let’s assume that you have invested Rs 1,00,000 in an equity mutual fund with a 1% exit load on withdrawal within one year. After six months, your investment increases to Rs 1,10,000. You want to redeem the entire amount. The calculations are as follows:
- Current value of the investment: Rs 1,10,000
- Exit load rate: 1%
- Exit load amount: Rs 1,100
- Amount to be received after exit load: Rs 1,08,900
Hence, you pay Rs 1,100 as exit load. But do not forget that this is the amount being deducted from your redemption value and not your initial investment. In case you wait for the exit load period to expire, you can save yourself from this exit load, unless the scheme has any other applicable exit load.
Taxation Still Matters
Exit load and capital gains tax are two separate concepts. Just because you do not pay any exit load does not mean that you will be free of paying any tax on your investment gains.
For example, gains arising out of equity mutual funds held for under 12 months are considered short-term capital gains. As per the prevailing tax laws in India, such gains are usually taxed at 20%, along with cess and surcharge.
How Can You Avoid Paying an Exit Load?
The easiest way is to check the scheme’s exit-load rules before investing. If you need money soon, avoid choosing a fund without understanding its withdrawal conditions. Also, remember that exit load is different from tax. Even if you don’t pay an exit load, capital gains tax may still apply.
Conclusion
Mutual fund exit loads may look small, but they can reduce your returns, especially when you’re withdrawing a large amount. Before redeeming your investment, check the applicable exit load and calculate how much you’ll actually receive.
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