If you have been investing in mutual funds for any amount of time, you most likely know about exit load. Some mutual funds, typically the equity kind will charge the investors some fees if they exit the fund (redeem investments), before a certain time period. This is done to discourage investors from prematurely exiting the fund.

You see, investment in equity is a long journey. You cannot invest today and expect stellar returns in a year. Of course this does not deter some people from having crazy expectations. It takes a long time to build wealth. There will be lots of up and downs in the short run. But in the long run it is much smoother and rewarding. But sometimes one might need to exit a fund and so it helps to understand how exit load works.

Disclaimer: I might name some mutual funds in this post. Do not misconstrue that information as recommendation. They are only for illustrative purposes only. I may or may not have been or still invested in those funds.

Most mutual funds have a tersely stated exit load like "1% for redemption within 365 days". See HDFC Top 100 mutual fund for this kind of exit load. Where as some other mutual funds may have a slightly more worded statement like "2% for redemption within 365 days, 1% for redemption between 366 - 730 days". Parag Parikh Flexi Cap Fund comes to mind in this case. Either way, the calculation of exit load is quite simple.

The exit load is a percentage of NAV that is deducted at the time of redemption if you exit prematurely. Lets take an example. Say you invested Rs. 50,000 when the NAV of a fund was Rs. 100. So you accumulated 50000 / 100 = 500 units. Then you redeem the full amount with in a year and the exit load for it is 1%. Further, lets say the NAV when you redeem is Rs. 110.

In this case, the exit load per unit will be 1% of the redemption NAV = Rs. 110 x 1% = Rs. 1.1. That exit load is deducted from the NAV, so the NAV after exit load = Rs. 110 - Rs. 1.1 = Rs. 108.9. Then your units are sold at that new NAV. So you get 500 units x Rs. 108.9 = Rs. 54450. I am not considering the STT paid to keep things simple. So instead of receiving Rs. 110 * 500 = Rs. 55000, you got a bit less. What you lost is the exit load.

While the previous exit load statement was quite clear, you might sometimes see another kind of exit load. Something that reads like "For units in excess of 10% of the investment, 1% will be charged for redemption within 365 days". I never understood what that meant. Is the 10% of investment the total investment? So I ran an experiment to find out how it works. Initially I was thinking it was out of the total investment, but I was wrong.

For starters, I started investing Rs. 50,000 per month for 10 months. So my total investment became Rs. 5,00,000. Then I redeemed Rs. 50,000 which is 10% of my total investment in the 11th month. Since I sold before 365 days, exit load should apply. But at the same time I sold only 10% of my total investment. Shouldn't that mean no exit load should apply? Apparently not. The exit load applies on the initial investment amount. Since my first investment was Rs. 50,000, and I sold Rs. 50,000 I actually sold 100% of my investment!

### The take away

There is a lot of math below. If math is not your cup of tea, you can skip to the next heading. All you need to know is that the exit load is applicable on the original investment and not the total investment. With that out of the way, here are some relevant transactions I made for this experiment.

I made just one redemption of Rs. 50,000 at an NAV of 23.462, but somehow the fund house split that into two transactions. And I had no idea how they arrived at those number of units. After making some calculations I finally understood how. All I know is that some units are sold at an NAV Rs. 23.227 which is 1% less of than the actual NAV of Rs. 23.462. Let's check the math.

From my initial investment of Purchase 1, the first 10% is free of exit load. So 2093.627 x 0.1 = 209.363 units are sold at the original NAV of Rs. 23.462. Then, 90% units of Purchase 1 had an exit load of 1%. That is 2093.627 x 0.9 = 1884.264 units are sold at NAV that is 1% less than the original NAV = Rs. 23.227. Notice that the 1884.264 units is what you see as Redemption 2 in the above table.

Thus the total amount is 209.363 x Rs. 23.462 + 1884.264 x Rs. 23.227 = Rs. 48678.59. But I sold Rs. 50,000, so the rest Rs. 1321.41 should come from my 2nd investment Purchase 2. At NAV of Rs. 23.462, the number of units that need to be sold from Purchase 2 is Rs. 1321.41 / Rs. 23.462 = 56.322 units. Adding 209.363 and 56.322 we get 265.685. Which is the same (minus STT) as Redemption 1 in the above table. So we have accounted for all the transactions.