What type of mutual fund has no exit load? Know here!
A mutual fund is a type of investment that pools money from various investors and then invests that money in bonds, stocks, money market instruments, and other securities. The main advantage of mutual funds is that they offer diversification and professional management at a relatively low cost. But most mutual funds have an “exit load”, which is levied when you exit a scheme before the specified time period. Is an exit load applicable to all mutual funds? Keep reading to find out!
What is an exit load?
An exit load is a fee charged by the fund house when an investor exits or redeems their units before a specified time period. The time period is also known as the lock-in period. The exit load can vary between different funds, but it is generally around one percent. This fee is charged to discourage short-term investment in the fund and to ensure that investors stay invested for the long term. However, not all mutual funds have an exit load. Some funds come with no exit load, which means that you can redeem your units at any time without incurring any charges.
Exit loads on the different types of mutual funds
- Debt funds
Some debt funds, like ultra-short duration funds and overnight funds, do not charge an exit load, making them particularly attractive to investors looking to minimise fees. Moreover, several types of debt mutual fund schemes, such as banking and Public Sector Undertaking (PSU) funds, also do not charge an exit load. This allows investors to get out of their investments quickly, if needed, without having to incur any additional costs or penalties. However, it is important to note that some debt funds that have a more accrual-based investment strategy may charge a higher exit load in order to discourage short-term trading and keep investors invested until the securities mature.
- Equity funds
Exit loads are typically charged in actively managed equity funds. However, index funds track the performance of a particular market index and there is no active stock-picking involved. So many of these funds do not charge any exit loads, making them an ideal choice for investors looking for a low-cost way to enter the stock market. Additionally, if you are looking for other options for investing in equity without an exit load, you can consider investing in Exchange Traded Funds (ETFs).
- Hybrid funds
Hybrid funds, including arbitrage funds, impose exit loads for early redemptions. However, these charges are generally levied on redemptions that take place within a specified timeframe, usually ranging from 15 to 30 days. It means that you should be prepared to hold your investment for at least one month or longer if you want to avoid incurring extra costs.
The bottom line
Investors can sometimes create undue volatility in the market through their frequent entry and exit, which can negatively impact the fund management process and disrupt long-term investment strategies. Thus, many experts see exit loads as a way to limit such trading behaviours and restrict investors from sudden or panic redemption from their funds. If you are aware of your investment objective and horizon, you can invest in mutual funds in a way that doesn’t require you to pay an exit load when redeeming your units.