We can’t count on one hand the number of investment instruments that are out there today. You have so much to choose from and so many scales to weigh.
But, if there is one investment that stands out in 2022, it would be mutual funds. During the first outbreak of the COVID-19 pandemic, people were led to be given more time, easy internet access, and also online mutual funds investments. It raised the bar, and today, most people invest in mutual funds.
Just like any other investment, mutual funds, too, have their own share of charges you would have to contribute. But, before we find out about everything you deal with while investing in a mutual fund – let us find out what a mutual fund is.
What is the Meaning of a Mutual Fund?
A mutual fund is administered by a registered AMC, for instance – the UTI asset management company. Here the investors come together and contribute towards a common fund in a single capacity. The regulatory framework for operations of these AMCs in India is overseen by the Securities and Exchange Board of India – the government agency that is headquartered in Mumbai, Maharashtra.
The major motive of the mutual fund is to create a common pool where consolidated collections are invested by fund managers in market-linked tools like shares, debentures, and bonds. The most obvious benefit of putting money here is that the overall risk is only limited to the investor’s amount. Unlike investing directly in the market where the risks are high – a mutual fund is secure – since the money of the investors is professionally managed by experts.
When it is compared to conventional options, such as FDs, RDs, and more – a mutual fund is known to give higher returns owing to the exposure to the financial market. Staying invested for a longer period implies better exposure to the market, thereby increasing the appreciation of the units held.
Now, there are various types of mutual funds out there. Also, mutual funds do have other costs, too; one of the most important ones is the exit load. Now – do not worry if you are confused about this bit that you would be paying. We can talk about it.
What is the Exit Load?
The exit load is a fee that AMCs charge the investor when they exit the scheme or redeem their units. The motive behind charging the fee is to discourage investors from exiting the scheme early.
Mostly, they would charge an exit load when an investor exits the scheme early, that is, before one year. The exit load would range from 1% to 5% of the investment – it also depends on the mutual fund house.
The exit load for different mutual funds is different; here is how you can understand this.
Exit Loads on the Varied Types of Funds
1. Debt Funds
Mutual funds charge exit loads on various equity and debt funds. However, specific types of debt funds, like overnight funds and ultra-short duration funds, do not charge a mutual fund exit load. From debt funds, apart from overnight and ultra-short duration funds, many schemes in certain types of debt funds like banking and PSU funds and more do not charge an exit load. Debt funds that follow an accrual-based investment strategy will usually charge a higher exit load because they want investors to stay invested till the securities mature to reduce interest rate risk.
2. Equity Funds
The mutual fund charges a higher exit load on equity funds than on debt funds, as equity funds are meant for the long-term investment period. Mostly actively managed equity funds will charge an exit load. However, a lot of index funds do not charge any exit loads. When you want to invest in equity funds and avoid these loads, you could also invest in an ETF that does not charge an exit load. Whether you want to invest in a zero exit load fund or not, you need to always remember that equity funds are meant for long-term investment tenures and invest according to that.
3. Hybrid Funds
Inclusive of arbitrage funds, they charge exit loads for the early redemptions. A lot of investors do misunderstand that arbitrage funds are meant for very short periods like overnight funds and that there are no exit loads on them. The truth is – that most arbitrage funds charge exit loads for redemptions within 15 – 30 days. You need to know that you have to have one month or longer as an investment tenure for arbitrage funds.
Now, some people might think exit loads are a burden, and some think otherwise.
But what is the truth?
Are these loads a good thing or a bad thing?
Let us find out here.
Is an Exit Load on your Mutual Funds Bad or Good?
The motive of exit load is to make sure that the investor has a long-term perspective on the investments. Without any exit load, fund managers could face a large redemption. High redemption would have an impact on the performance of the fund. It is because the fund has to sell its holding to meet the redemption needs.
A fund manager would often curate portfolios with a long-term perspective as well. A short-term redemption would have a significant impact. Having an exit load will help align the fund’s goal and the investor’s time horizon.
An early exit by you would have an impact on the returns of existing investors. The exit load can help you avoid this case of reinvestment, the amount to benefit investors that still hold the assets.
Only if you have a long tenure in mind – do you need to invest in equity funds.
Also, if you are staying in for the long term, you would not be worried about the exit load because you would not be paying it at all.
Read more: Mutual Funds vs ULIP: Where to Invest
A mutual fund is known to be one of the best investments these days, and mutual funds are also known to be one of the most flexible ones. Though it has its share of flexibility and convenience, it also has certain lines that you want to know – one such of them is the exit load.