Why Checking For Exit Loads in A Mutual Fund Is A Must For Investors?

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    Each time you buy a mutual fund and want to sell the same within a few months, chances are you would end-up paying an exit load.

    Why Checking For Exit Loads in A Mutual Fund Is A Must For Investors?
    An exit load is nothing, but the 1 per cent charges that you would pay for selling the scheme within a short period of time.

    Most mutual funds schemes charge a rate of 1 per cent for exiting the scheme before a period of 365 days.

    For example, HDFC Top 200 has an exit load of 1 per cent if you sell the scheme within 540 days. Take a look at whether exit loads are justified in the first place.

    Let's say there are scores of mutual fund investors who hardly bother taking a long term position.

    They buy and then sell after six months at the net asset value. Now without an exit load there would be problems for the fund.

    For example, if the fund has to sell a large portion of its holdings it affects the cost at which it sells the holdings. Apart from this there are other costs like Brokerage and Security Transaction Cost which it has to incur.

    Now, this can easily cause losses to the fund if everybody starts redeeming after just a few months.

    Exit Loads Charged By Select Mutual Funds

    Mutual Fund Name Exit Load
    HDFC Top 200 1% for redemption within 540 days
    ICICI Prudential Top 200 1% for redemption within 1095 days
    LIC Nomura MF Growth Fund 1% for redemption within 365 days
    Axis Equity

    1% for redemption within 365 days

    ICICI Prudential Focused Equity

    1% for redemption within 365 days

    UTI Top 100 Fund

    1% for redemption within 365 days

    Principal Large Cap Fund

    1% for redemption within 365 days

    To a large extent therefore exit loads maybe justified. On the other hand expense ratio has always been a contentious issue and many have advocated some prudence in this area.

    Expense ratio in a mutual fund is nothing, but the amount that a fund takes to manage your money. If it is 1.5 per cent, then this could reduce your returns accordingly, making for lower returns.

    Exit loads in most cases are justified as this would inculcate a sense of discipline in investors to take a long term view on the markets.

    Otherwise without an exit load long term investors would see their returns diminishing on account of various charges incurred by the fund, due to frequent withdrawal by short term investors.

    Why checking for exit loads in mutual fund is important?

    As can be seen from the above table, there are many funds, who more or less charge the same exit load. But there are many who charge an exit load of 1 per cent and increase the holding beyond 365 days.

    It is therefore advised to check the exit load before you invest. It's also important to ensure that you hold the scheme for a long term, not only because of the exit load, but also because you would always earn superior returns from a mutual fund in the long term.


    Read more about: mutual funds
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