Exit Load on Liquid Mutual Funds

Exit load is a charge levied on mutual fund investments if the investor makes a redemption before the end of the specified holding period. It is not uniform across mutual fund schemes; it may differ per the chosen scheme's investment objective and time horizon.

Exit load is applied to protect investors' financial interests, discouraging them from redeeming their investments too early. It may bring an essence of discipline in investors to remain invested for the scheme's minimum applicable time period and reap reasonable returns.

The exit load and holding period are generally higher for equity funds, as they are meant to be held for long-term investment tenures. Further, debt funds with lower portfolio maturity or duration tend to have low to nil exit load. In contrast, longer-duration funds or those following an accrual investment strategy may have a comparatively higher exit load. This is to reduce the impact of interest rate movements on investments.

Additionally, fund managers would prefer investors who share the scheme's objective and time horizon. The scheme would then benefit from the fact that all its investors are aligned to the specified time horizon. Redemptions would be minimal, and the fund manager's strategy would not be impacted. For investors, the chosen fund's exit load will not directly impact liquidity, but it will simply discourage them from redeeming their investments too early.

Impact of exit load on premature withdrawal/redemptions

Exit load is calculated as a percentage of fund NAV and not on the actual returns earned by the investors. As such, the exit load impacts the overall returns.

Mutual funds cannot charge an exit load beyond the levels specified in the scheme information documents or any addendum as may be issued. Further, if any mutual fund scheme changes its exit load structure, implementing such changes can happen only prospectively and not on existing investments.

Investors may also note the difference between the applicability of exit load and lock-in period in a mutual fund scheme. Even when an exit load is levied, the investors can request for redemption of mutual fund units in case of open-ended schemes and where there is no lock-in period applicable. Mutual fund investments cannot be redeemed during the lock-in period.

Exit load on liquid funds

The exit load on liquid funds is regulated by the SEBI (Securities & Exchange Board of India) guidelines, wherein the liquid funds can charge exit load in a graded manner staggered over 7 days period, as given below.

There is no exit load applicability if the units are held for 7 days or more in a liquid fund.

How is exit load calculated at the redemption of mutual fund units?

Exit load is levied on the redemption NAV and can be calculated by multiplying the exit load value with the applicable NAV.
Suppose an investor redeems 500 mutual fund units with NAV Rs. 100 before the specified investment period expires, the exit load is 1%. The NAV applied at the time of redemption will be Rs. 100 minus 1% of 100 i.e., Rs. 99. As such, the investor will receive Rs. 49,500 (Rs. 99 multiplied by 500 units) on redemption of mutual fund units. Had there been no exit load, the investor would have received Rs. 50,000 (Rs. 100 multiplied by 500 units) as redemption proceeds towards the mutual fund units.

Tax treatment of exit load

The appreciation in the investment value against the cost of investment is taxed as capital gains at redemption. If exit load is applicable on the redemption transaction, the redemption proceeds are calculated net of the exit load.

In the above example, Rs. 49,500 would be considered as the redemption proceeds for calculating capital gains, and not Rs. 50,000. Accordingly, the investor can deduct the exit load charged at the redemption while computing the capital gains applicability for taxation purposes.

Note: The tax provisions mentioned in the article are for illustrative purposes only and are updated as per the Union Budget 2022 presented in the Parliament in February 2022. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the investment date. Please contact your tax advisor for professional tax advice.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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