What is the meaning of exit load in mutual funds? Can you explain with a real example?

Pre September 2009 the mutual fund equity products were defined by an entry load. This basically means that a small percentage of the investment amount was deducted and used to cover various expenses including advisors fees. However, this was deemed to be “not fair” to investors and the system of upfront payment(load) was discontinued. However, the expenses remained. To solve this problem, the regulator decreed that an expense ratio (a percentage to be chartged) would be used to defray expenses and from then on advisors would be paid on a value of fund calculated daily. However, there were some expenses the fund house took upon themselves at the time of account/folio creation and to discourage frequent churns between schemes a system of exit load was introduced.

An exit load is nothing but a charge that is levied on an investor if the investor were to make redemptions before a minimum applicable time frame. After the time frame is crossed, the exit loads come down to nil. It is charged on a proportional basis.

 

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