When you invest in a mutual fund and then redeem (sell) your units before a certain period, the fund may charge you a small fee. This fee is called the exit load.
Exit load is designed to discourage short-term trading in mutual funds and protect long-term investors. In this post, we explain how it works, when it applies, and how you can plan around it.
What is Exit Load?
Exit load is a fee charged by a mutual fund when you redeem your units before a specified holding period. It is expressed as a percentage of the redemption value.
For example, if a fund has an exit load of 1% if redeemed within 1 year, and you redeem ₹1,00,000 worth of units after 8 months, the fund will deduct ₹1,000 as exit load. You will receive ₹99,000.
If you redeem the same units after 1 year and 1 day, no exit load is charged.
Why Do Mutual Funds Charge Exit Load?
Mutual funds are designed for medium to long-term investing. When investors buy and sell units frequently:
- The fund manager has to keep more cash on hand to meet redemptions, which reduces overall returns
- Frequent buying and selling creates transaction costs that all investors end up bearing
- Short-term trading goes against the purpose of most mutual fund schemes
The exit load acts as a gentle deterrent against short-term exits, ensuring that the fund operates smoothly for all investors.
Common Exit Load Structures
Different types of mutual funds have different exit load rules:
Equity Mutual Funds
Most equity funds charge 1% if redeemed within 1 year. This is the most common structure across large-cap, mid-cap, multi-cap, and flexi-cap funds.
ELSS (Tax-Saving) Funds
ELSS funds have a mandatory 3-year lock-in period. You cannot redeem at all during this period. After 3 years, there is no exit load.
Liquid Funds
Liquid funds have a graded exit load for very short holding periods:
- Day 1: ~0.0070%
- Day 2: ~0.0065%
- Day 3: ~0.0060%
- … gradually decreasing
- After 7 days: No exit load
The exit load on liquid funds is very small and only applies for the first week.
Overnight Funds
No exit load. These funds invest in securities that mature the next day and are designed for very short-term parking of money.
Debt Funds
Varies by fund type. Some debt funds have no exit load, while others charge 0.25% to 0.50% for redemptions within a few weeks or months.
Solution-Oriented Funds
Retirement and children’s funds may have exit loads for 5 years or more, in line with their long-term objectives.
How is Exit Load Calculated?
Exit load is calculated on a First In, First Out (FIFO) basis. This means the units you purchased first are considered to be redeemed first.
Example
Suppose you made three SIP investments in a fund with a 1% exit load for redemptions within 1 year:
| Investment Date | Amount | Units at NAV ₹100 |
|---|---|---|
| January 2026 | ₹10,000 | 100 units |
| February 2026 | ₹10,000 | 100 units |
| March 2026 | ₹10,000 | 100 units |
Now, in February 2027, you redeem 200 units:
- First 100 units (from January 2026): Held for more than 1 year → No exit load
- Next 100 units (from February 2026): Held for exactly 1 year → No exit load (most funds use “more than 365 days” as the threshold)
If you had redeemed in December 2026 instead:
- First 100 units (from January 2026): Held for ~11 months → 1% exit load applies
- Next 100 units (from February 2026): Held for ~10 months → 1% exit load applies
Understanding FIFO is important, especially for SIP investors, because each SIP installment has its own purchase date and its own 1-year clock.
Exit Load and NAV
When you redeem units, the exit load is deducted from the applicable NAV. The formula is:
Redemption Price = NAV × (1 - Exit Load %)
So if the NAV is ₹150 and exit load is 1%:
Redemption Price = ₹150 × (1 - 0.01) = ₹148.50
You receive ₹148.50 per unit instead of ₹150.
Where Does the Exit Load Go?
The exit load collected by the fund is added back to the fund’s assets. This means it benefits the remaining investors in the fund. It does not go to the AMC or the fund manager as extra income.
This is a fair mechanism — if someone exits early and causes costs to the fund, the fee compensates the investors who stay.
How to Avoid Exit Load
- Check the exit load before investing — Every fund’s exit load is mentioned in its Scheme Information Document (SID) and factsheet
- Hold for the required period — Most equity funds require just 1 year. Plan your investments accordingly
- Use liquid or overnight funds for short-term needs — These have minimal or no exit load
- Be mindful of SIP dates — Each SIP installment has its own holding period. If you need to redeem, check which installments have completed the exit load period
- Switch instead of redeeming — Some fund houses allow switches between schemes with different exit load treatment. Check with the AMC
Exit Load vs Expense Ratio
Do not confuse exit load with expense ratio. They are different:
| Factor | Exit Load | Expense Ratio |
|---|---|---|
| When charged | Only at redemption | Continuously, deducted from NAV daily |
| How often | One-time (at exit) | Ongoing (annual) |
| Avoidable? | Yes, by holding for the required period | No, it is always charged |
| Who benefits | Remaining investors in the fund | Covers fund management costs |
Key Takeaways
- Exit load is a fee charged when you redeem mutual fund units before a certain holding period
- Most equity funds charge 1% for redemptions within 1 year
- It is calculated on a FIFO basis — each purchase lot has its own holding period
- Liquid and overnight funds have minimal or no exit load
- The exit load is added back to the fund and benefits remaining investors
- Always check the exit load before investing, and plan your holding period accordingly
Exit load is not a penalty — it is a mechanism that protects long-term investors. By simply being aware of it and planning your holding period, you can avoid it entirely and keep more of your returns.
