Exit load in mutual funds

Exit load is a fee charged by a mutual fund to an investor upon redemption of units before a specified minimum holding period has elapsed. It is expressed as a percentage of the redemption amount or the applicable NAV, and it is deducted from the redemption proceeds before the net amount is paid to the investor. Exit loads serve two purposes: they deter short-term redemptions that destabilise the fund’s portfolio and impose transaction costs on remaining unitholders, and they provide a modest income to the scheme that partially offsets redemption-related costs.

Exit load is credited back to the scheme’s assets (not retained by the AMC), per SEBI regulations.

Formula

\[ \text{Net redemption amount} = \text{Units redeemed} \times \text{Applicable NAV} \times (1 - \text{Exit load %}) \]

If an investor redeems 1,000 units at a NAV of ₹50.00 and the applicable exit load is 1 per cent:

\[ \text{Net proceeds} = 1{,}000 \times 50.00 \times (1 - 0.01) = ₹49{,}500 \]

The ₹500 exit load is credited to the scheme’s asset pool, benefiting continuing investors.

SEBI regulations on exit load

SEBI (Mutual Funds) Regulations, 1996 and subsequent SEBI circulars govern exit loads:

• Maximum exit load: SEBI capped the maximum exit load at 1 per cent of NAV for most categories.
• Disclosure: Exit load must be disclosed in the scheme information document (SID), key information memorandum (KIM), and on the AMC’s website.
• Credit to scheme: The full exit load collected is credited to the scheme, not the AMC’s revenue. This has been a SEBI requirement since 2012.
• No exit load for switches within the same scheme: SEBI clarified that switching between plans of the same scheme (e.g., growth to dividend reinvestment) does not attract exit load.

Typical exit load structures by category

Liquid fund graded exit load (SEBI mandate)

SEBI circular SEBI/HO/IMD/DF4/CIR/P/2019/093 dated 28 August 2019 mandated a graded exit load for liquid funds to deter very short-term redemptions. The structure is:

This replaced the previously nil exit load on liquid funds, responding to episodes of large short-term redemptions by institutional investors.

Exit load on SIP units

For systematic investment plan (SIP) investments, each instalment is treated as a separate purchase with its own date. When an investor redeems from a scheme that has an SIP, the exit load applicability depends on the holding period of each individual unit tranche:

• Units purchased in an SIP 13 months ago are exit-load-free (past 1-year threshold).
• Units purchased 8 months ago attract exit load.

This is computed on a first-in-first-out (FIFO) basis by default, unless the investor specifies otherwise. The FIFO method means older units (exit-load-free) are redeemed first.

Exit load vs entry load

Until August 2009, mutual funds charged an entry load on new investments, typically 2.25 per cent for equity funds. SEBI abolished entry loads through circular SEBI/IMD/CIR No. 4/168230/09 dated 30 June 2009, effective 1 August 2009. Exit loads persisted and became the primary load-based charge mechanism. See entry load, historical note for details of the abolished regime.

Exit load and capital gains tax

Exit load is deducted from redemption proceeds before computing the net sale consideration. However, for capital gains tax purposes, the sale consideration is the amount actually received (after exit load deduction). The exit load amount is therefore not added back for tax computation, investors receive no tax benefit from paying exit load.

Exit load and the TER

Exit load is distinct from TER. TER is an ongoing annual charge deducted daily from NAV. Exit load is a one-time charge at redemption. Both reduce investor returns, but at different stages.

Exit load on dividend reinvestment

When a fund pays a dividend and the investor has opted for dividend reinvestment, the reinvested units are treated as new purchases and carry a fresh exit load clock. This is a frequently overlooked point for long-term investors in dividend reinvestment plans.

Stamp duty vs exit load

Since 1 July 2020, mutual fund units are also subject to stamp duty of 0.005 per cent on the purchase (not redemption). Stamp duty and exit load are separate charges applicable at different transaction stages and should not be conflated.

How to check exit load before investing

• Scheme information document (SID): Definitive source; the exit load section specifies exact percentage and applicable holding period.
• Key information memorandum (KIM): Summary document with exit load disclosure.
• AMFI website (amfiindia.com): Searchable NAV and scheme details including exit load.
• AMC website: Product pages typically show exit load prominently.

See also

• Entry load, historical
• Stamp duty on mutual fund units
• Total expense ratio
• Capital gains tax in India
• Mutual fund lock-in periods
• Mutual fund
• SEBI

References

1. SEBI (Mutual Funds) Regulations, 1996, Regulation 52 and related regulations on loads.
2. SEBI circular SEBI/IMD/CIR No. 4/168230/09 dated 30 June 2009, abolition of entry load.
3. SEBI circular SEBI/HO/IMD/DF4/CIR/P/2019/093 dated 28 August 2019, graded exit load on liquid funds.
4. AMFI, Scheme details and exit load disclosures at amfiindia.com.
5. SEBI circular on exit load to be credited to the scheme, 2012.