Paying for exiting mutual fund

If you have invested in mutual funds, you may be well aware that when you sell the units of mutual funds within a specified time, you have to pay exit load on the amount realised on sale of units. The exit load is usually payable if the units are sold within one year of purchase and the load is usually 1% of the sale amount.

Mutual funds are meant for the long term and, therefore, mutual fund houses would like to see investors remaining invested over the long term. Hence, mutual fund houses impose exit load on sale of mutual funds to discourage early withdrawals by the investors. However, if an investor has to exit the mutual fund scheme due to some reason, then he has to take the cut in the form of exit load to make an early exit.

The exit load imposed by mutual fund houses is justified because if a large number of investors submit requests for redemption of units, the fund manager may have to make a distress sale of shares to meet the redemption pressure. This might negatively impact the return on investments of those unitholders who choose to remain invested in the scheme.

The exit load may be a flat exit load or a tiered exit load. The flat exit load charges a flat percentage for exiting from the scheme before a certain period of time. The tiered structure exit load will charge at a higher rate for early withdrawals after which the rate tapers down for various time periods, and becomes nil after usually three years.

Considering this, investors should remain invested for a minimum of three years in mutual funds to reap higher returns on their investments and also avoid paying the exit load.