Exit loads are minor penalties that Asset Management Companies (AMCs) impose to discourage investors from redeeming their mutual funds prematurely.
How exit loads work
AMCs calculate your exit load on the Net Asset Value (NAV) for each investment or Systematic Investment Plan (SIP) according to the exit load mentioned in the factsheet for the particular month when you purchased the fund. You can learn more about fact sheets by visiting zerodha.com/varsity/chapter/the-mutual-fund-fact-sheet.
Here's how exit loads affect your redemption:
- You invest ₹50,000 in a mutual fund with an exit load of 1% and a NAV of ₹50. You receive 1,000 units for your investment.
- You decide to redeem 1,000 units when the NAV reaches ₹60.
- The AMC deducts the 1% exit load from the latest NAV of ₹60.
- Exit load amount: (1% of ₹60) × 1,000 units = ₹600.
- Your redeemable amount: ₹60,000 - ₹600 = ₹59,400.
- This means you receive ₹59,400 instead of the full ₹60,000 due to the exit load penalty.