Exit Load — What It Is and When It Actually Applies

The scheme states a period and a charge. Redeem units held for less than that period and the charge is deducted from the proceeds. Redeem after it and nothing is deducted.

The exact period and rate vary by scheme and by category, and both are stated in the scheme documents and on the monthly fact sheet rather than being discretionary. Our pages on the scheme information document and the fact sheet cover where to find them.

It is charged as a percentage of the amount being redeemed, and it comes out of what reaches you rather than being billed separately.

This is the part that produces most of the surprise, and it follows from a simple fact: each instalment bought units on a different date.

So the units from your first instalment may be years old while last month units are weeks old. A redemption from a scheme you have held for five years can still attract a load, if the units being sold happen to be recent ones.

What helps is that schemes generally redeem on a first in, first out basis, meaning the oldest units go first. For somebody with a long-running SIP redeeming a modest amount, that usually means the units sold are well past the load period and nothing is charged.

The people who get caught are those redeeming a large proportion, or redeeming from a SIP that started recently. Our post on exit load and your SIP works through examples.

Several situations where there is no load at all, and knowing them prevents unnecessary caution.

• After the stated period. The most common case and the simplest.
• Categories that do not charge one. Many schemes at the very short end of the debt ladder have no load or a very brief one, which is part of why they suit money that may move, as our page on liquid funds covers.
• Some schemes allow a portion to be redeemed within the period without a charge. Whether yours does is stated in the documents.
• Where a lock-in applies instead. An ELSS scheme prevents redemption during the lock-in rather than charging for it.

Three ordinary-sounding requests that trigger the load if the units are recent.

A switch between schemes is a redemption followed by a purchase, so the load applies to the sale leg, as our page on switching between schemes explains.

Moving from a regular plan to a direct plan is also a switch, even though the scheme is identical.

A systematic transfer plan is a series of switches, one per instalment, so a load on the source scheme applies to each of them, which our page on the systematic transfer plan covers.

A systematic withdrawal is also a redemption, though for a long-running holding the units being sold are usually old enough that it does not arise.

It is not primarily a revenue measure, and the reason is worth knowing because it explains where you find one.

Money arriving and leaving quickly forces the manager to buy and sell at times the portfolio did not need, and those trading costs fall on everybody in the scheme. The load discourages short holding periods and, where charged, the amount stays in the scheme rather than going to the fund house.

That is why an equity scheme built for long holding typically has one, and a scheme designed for money that moves frequently typically does not. The presence of a load is a signal about the intended holding period, which is useful information in itself.

Three things it gets confused with, and the distinctions matter because the consequences differ.

It is not a penalty for stopping a SIP. Stopping the instruction costs nothing at all. The load only arises if you redeem units, and stopping instalments while leaving the holding alone is free, as our post on stopping a SIP explains.

It is not a lock-in. A load makes early exit cost something. A lock-in prevents it entirely, and the two are frequently conflated when people describe a scheme as having money tied up.

It is not the expense ratio. The ratio is charged every year whether you do anything or not. The load applies once, only on early redemption, and most long-term investors never pay it.

Four practical points, and the first two cover almost every case.

• Check the load period before investing, not when you want the money.
• Do not put money you may need soon into a scheme with a load, which is another way of saying match the holding to the horizon, as our page on asset allocation sets out.
• Where a partial redemption will do, take only what you need, since older units are sold first.
• Count it before switching, alongside the tax, as part of deciding whether the move is worth it.

Our page on mutual fund charges puts this alongside the other costs so you can see which ones actually matter. If you want to check what your existing holdings carry, get in touch.