Understanding Entry and Exit Loads

One of the most important factors while making an MF investment is to know clearly the impact of entry and exit load.

After 2008, when the country was struck with the aftermath of a market crash, a trend of zero Entry Load set in which was gradually adopted by most of the funds.

As of today, almost every MF gives the benefit of a zero Entry Load, but there are Exit loads which do apply.

Let us understand how to work out with these parameters.

#1. The Entry Load

The entry load is the transaction fees charged on a fund while purchasing the mutual fund instrument. The percentage is anywhere between 0.5% to 1%. 

As mentioned earlier, most of the MFs have done away with the Entry Load concept to encourage buyers to purchase their funds. 

Let's say you intend to start an SIP of MF X, with an entry load of 1%, and investment of Rs. 5000/- per month for 12 months. Let's say, the NAV of the fund on that date is 17.27. 

When no entry load is applied. the no of units purchased will be  =  (5000/17.27) = 289.519 units, 

Now, if the entry load of say 1%, is applied, the no of units purchased will be as under:-

1. Entry load of 1% on Rs. 5000/- = (0.01 x 5000) = Rs. 50/- 
2. The balance amount for purchase of units will be = Rs. 5000 - Rs. 50 = Rs. 4950/- 
3. Hence, the total units purchased will be = (Rs. 4950/ 17.27) = 286.624 units

There is very little impact due to Entry load and hence not much to your portfolio is affected. 

#2. The Exit Load

The exit load is the transaction fees charged on a fund while closing or selling off the mutual fund instrument. The percentage is anywhere between 0.5% to 1%. 

The Exit Load though looks 1% but as we work out on the example ahead, you will be able to see the difference yourself,. 

Now, lets say, that by the end of the year, you have accumulated 3500 units through your SIP with an NAV of 24.325. So, your portfolio stands at = (3500 x 24.325) = Rs. 85,137.50/- 

As per present Govt regulation, an SIP investment on Equity Mutual Funds for a period of one year will have no Exit Load. Read the SEBI Document here. 

But wait here a moment! Does it mean that you can redeem all amount on the 13th month itself?

The simple answer is NO. You cannot. 

Before we check whether we can save on the exit load or not, first let us find out how much exit load will be applicable. 

Most MFs apply an Exit Load of 1% on PRINCIPAL AMOUNT ONLY and NOT ON THE PROFITS EARNED. This is explained as under:-

Let us consider the previous example as in Entry Load in which an SIP of Rs. 5000/- per month is been made for a period of 1 year which earned 3500 units @ NAV of 24.325. 

#Case-1: Amount Redeemed on 13th Month

When you redeem the entire amount on the 13th month, the Exit load is applicable on the Principal amount of Rs. 60000/- only @ 1% which is calculated as under:-

1. Exit Load on Principal @ 1% =  (Rs. 55000 x 0.01)  = Rs. 550/- 
2. Amount on Redemption = Rs. 85,137.50/- - Rs. 550.00/- = 84587.50/- 

Since only the first month installment has completed a 12 month cycle, only that amount is not charged with the Exit load. So, Rs. 5000/- will not be charged with Exit Load and the remaining amount of Rs. 55000/- is charged @ 1% Exit Load when closing the fund. 

#Case-2: Amount Redeemed after 25th month

This means that the last installment amount of Rs. 5000/- has completed a period of 12 months hold. 

So, when you redeem the amount on the 25th  month, every monthly installment would have been invested for a period of 12 months and hence, is not charged any exit load. 

To understand this, the simple logic to know here is if you are running an SIP, each installment should complete a period of 12 months to become tax rebatable. 

While the amount for SIP exit load seems trivial as in this example, for higher amounts, if you check the comparison, the exit load is almost 10 times that of the Entry Load. 

Hence, for any Fund Management Company, it is easier to give away the Entry Load, as the earning is on the opening amount only, whereas in case of Exit Load, the percentage is charged over the total installment or invested amount at the time of Selling the Fund.