Exit Load in Mutual Funds: What It is and How It Affects Your Returns

You’ve begun investing in mutual funds, and at some point, perhaps only a few months, you decide to redeem your money. Then, the surprise arrives. The returns are not what you expected. Why? 

One likely reason is the exit load — a fee that many investors overlook or misunderstand. 

If you’ve ever asked, “What is an exit load in mutual funds?” or “How much will I lose if I redeem early?” — this guide breaks it down clearly for you.

What is Exit Load in Mutual Funds?

Mutual fund houses deduct from your investment if you withdraw it before completing the required investment period. This is called an Exit Load. Think of it as a penalty for early exit, designed to encourage long-term investing.

Example:
You invest ₹5,00,000 in a mutual fund that charges a 1% exit load if redeemed within one year. If you withdraw after 10 months, you’ll be charged ₹5,000 and receive ₹4,95,000.

While this might not seem substantial on small amounts, for larger portfolios or frequent redemptions, exit load in mutual funds can significantly reduce your net returns.

Why Do Mutual Funds Charge an Exit Load?

Exit load might look like a penalty, but it’s actually a way for mutual funds to promote smart investing and to ensure smooth conduct of mutual fund houses. Here is why it exists:

1. To Encourage Long-Term Investing

Mutual funds, especially those with an equity-oriented nature, are generally used for long-term wealth creation. However, when investors redeem their shares early, they are actually consuming the capital that the idea of compounding is built on. Exit loads are designed to prevent short-term or speculative withdrawals that can interfere with compounding and the fund’s long-term strategy.

2. To Maintain Liquidity and Stability

If there were a situation in which a large number of investors withdrew funds at the same time, this could lead the fund managers to sell their high-quality holdings at disadvantageous prices in order to meet the liquidity demand of the clients. In these circumstances, the fund’s progression would be severely impacted. Exit load is useful in these cases, as it acts as a deterrent that avoids hasty sale of shares and maintains a favourable level of liquid assets.

3. To Offset Transaction Costs

When units are bought or sold, various expenses occur, such as brokerage, taxes, and impacts, among others. Too many withdrawals have the potential to raise the fund’s operating costs. Exit loads help recover these expenses from investors who redeem early, so long-term investors aren’t unfairly charged.

4. To Protect Serious, Long-Term Investors

If an investor commits to a fund for, say, 3 years to build wealth, short-term investors exiting early can cause volatility. This forces the fund to sell assets it would rather hold, disrupting the fund’s strategy. Exit loads help limit such quick withdrawals, protecting genuine long-term investors.

5. To Support Better Fund Planning

The exit load would enable fund managers to more accurately predict future redemptions. Having a transparent exit load structure, managers can come up with their investment strategies easily because the fund is immune to unplanned cash outflows.

Mutual Fund Withdrawal Charges: How Exit Load is Calculated

The exit load is calculated on the amount you choose to redeem. For example, let’s say you invested ₹2,00,000 in a mutual fund that has a 1-year exit load period of 1%. After 10 months, your investment grows to ₹2,50,000, and you decide to redeem the full amount. Since you’re withdrawing before completing the 1-year holding period, an exit load of 1% will apply. This means 1% of ₹2,50,000—i.e., ₹2,500—will be deducted as the exit load, and you will receive ₹2,47,500..

Exit Load Periods: How Long Should You Stay Invested?

Each mutual fund decides its exit load structure. The comparative percentage of exit load in different categories of mutual funds is mentioned below:

Tip: We recommend you read the mutual fund’s Scheme Information Document (SID). It’s where you’ll find exit loads, lock-ins, and other critical details. The upper limit of the exit load is regulated by SEBI, but the final charges are determined by the Fund house itself.

Can You Avoid Exit Load?

Yes, and here’s how:

1. Hold till the exit load period ends

Know the date of your investment and then redeem it after the required duration.

2. Use an SIP strategy

For SIPs, the exit load is determined for every contribution based on the individual’s investment date. If you want to withdraw money, start with the older units first.

Real-Life Example: The Cost of Withdrawing Early

Let’s take an example to see how exit load affects your final amount:

• Investment: ₹ 5,00,000 in a large-cap equity fund
• Exit Load: 1% if redeemed before 1 year
• NAV: ₹ 100 at investment| ₹ 120 at redemption after 10 months
• Units Purchased: 5,000
• Redemption Amount: 5,000 x 120 = ₹ 6,00,000
• Exit Load Deducted: 1% of ₹ 6,00,000 = ₹ 6,000
• Final Amount Received: ₹ 5,94,000

Though your investment grew, you lost ₹ 6,000 by withdrawing two months early.

Does Exit Load Apply to SIPs‌?

Yes, but here’s where it gets tricky.

In the case of SIPs, the exit load is calculated for each contribution depending on its date of investment. In this case, if you have been using SIP for 12 months and would like to redeem now, then only the last few instalments might have an exit load.

If your fund has a 1-year exit load period and you’ve been investing monthly:

• SIP 1 (Jan 2024) – No exit load if redeemed after Jan 2025.
• SIP 12 (Dec 2024) – Exit load will be applicable if withdrawn before Dec 2025.

Final Thoughts

Exit load in mutual funds is often mistaken for a general withdrawal charge, but it’s only applicable if you exit early. By understanding the exit load structure, you can time your withdrawals and avoid unnecessary costs. It’s not about avoiding redemption altogether — it’s about doing it smartly. Smart investing is not just about picking the right fund. It’s also about knowing when and how to redeem your money.

FAQs

1. Do I have to pay exit load on all mutual funds?

No, not all. One example could be ‌overnight liquid funds that don’t have an exit load. On the other hand, equity funds usually require investors to pay a 1% exit load if they redeem units within one year.

2. Is the exit load charged only on the profit?

No, it’s charged on the current market value of your investment, whether or not you have made a profit.

3. Can I avoid exit load in SIP?

Yes, you can, but by doing so, you are allowed to get only the units of SIP that have been held longer than the exit load period.

4. Does the exit load affect tax calculation?

Exit load is added to your redemption; thus, your net proceeds become less and the tax will be calculated on the net amount.

5. How do I find the exit load of my fund?

You may check the Scheme Information document on your fund’s website or mobile application.