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EXPENSE RATIO AND EXIT LOAD IN MUTUAL FUND


Expense Ratio: An expense ratio refers to the percentage cost of organizing, overseeing, operating and superintending a mutual fund scheme.

It is calculated by dividing the Total Expenses by Asset Under Management. For a mutual fund scheme, various expenses are incurred including marketing costs, distribution costs, administration costs and compliance costs.

For an Investor, the Expense ratio refers to the fee charged by the mutual fund house to the investor for managing and superintending the Mutual Fund. The expense ratio is charged by AMC after considering Securities Exchange Board of India (SEBI) guidelines which specify expense ratio limits. The lower the expense cost, the better it is for the investor as lower expense cost will boost returns and Net Asset Value.


Exit Load: Exit Load refers to the fee charged by Asset Management Companies (AMCs) to the investor for retrieving funds before the lock-in period of the fund. However, not all mutual funds charge an exit load at the time of withdrawal of funds.

To ensure that whether the mutual fund charges exit load or not, the investor needs to carefully read the Offer Document or Scheme Information Document (SID). Exit load aims to discourage short-term trading and compensate for the expense or loss that the mutual fund has to incur or bear due to the withdrawal of funds by the investor.

Exit load is levied as a percentage of the value of the units redeemed by the investor and deducted from the redemption proceeds. For instance, if an investor withdraws funds worth Rs. 100000 and the exit load is 1% then the amount of exit load will be 100000*1% = 1000 and the balance Rs. 99000 will be paid to the investor by Asset Management Company.


Exit loads on different categories of Mutual Funds

Different categories of mutual funds levy different rates of exit load on investors. Exit load also varies as per Asset Management Company. Here’s a general outline of the application of exit loads.

1. Equity Funds: These funds offer high risk and return and aim for long-term investment, therefore, equity funds have a higher exit load. However, certain equity funds don’t charge exit load as well.

2. Fixed Income/ Debt Funds: Debt funds may or may not have exit loads applicable. Generally, these funds have lower exit loads as compared to equity funds. For instance, the exit load can be around 0.5% if redeemed within 90 days.

3. Hybrid Funds: Hybrid funds seek a balanced approached approach between equity and debt and exit load may be applicable in these funds.

4. Arbitrage Funds: These funds also impose an exit load, however, if an investor redeems the fund within 15 to 30 days, there’s no exit load. Hence, it is advised to have an investment tenure of one month or longer in these funds.

5. Liquid Funds: These funds offer high liquidity to investors, therefore generally there’s no exit load applicable in liquid funds. There is exit loan only if the investors exit within seven days

6. Systematic Investment Plan: In SIP, exit load will vary as per the investment tenure and lock in period of the mutual fund scheme.

Before investing in any mutual fund scheme, the investor needs to consider the applicable exit load and lock in period to evaluate the liquidity of the mutual fund scheme and whether the investment horizon is suitable for the investor.


Direct Plans and Regular Plans: In Direct Plans, Investors can invest directly through AMCs or other online platforms without any Financial Intermediaries whereas in Regular Plans, investors invest through an intermediary i.e., a broker who receives a commission in exchange of these services. Along with this, there are certain differences between direct plans and regular plans based on expense ratio, returns and Net Asset Value.

The expense ratio is higher in the case of Regular plans than direct plans due to the commission paid to the broker. A lower expense ratio leads to higher return in case of Direct Plans.

Similarly, Net Asset Value is also higher in case of a direct plan than regular plan.

Direct plans are considered easier and simpler to deal with, as there is no intermediary involved.

However, it is to be kept in mind that an investor needs to have proper knowledge and apply due diligence while investing.


For other interesting conceptual topics please visit our other contents:

What is foreign exchange and how it is determined: https://www.thenumbernews.com/post/foreign-exchange


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