Entry Loads and Exit Loads have now replaced by the term Expense Ratio in Mutual Funds Investment. However, sometime before, a kind of Entry load was charged to investors while they start investing in mutual funds, and a kind of exit load was charged to them for the early withdrawal of their investment.
Now, the concept of entry load has been over, however, exit load is applied on some limited number of schemes. These terms have now been replaced by Expense ratio or Total Expense Ratio.
TER or Total Expense Ratio, also known as Net Expense Ratio, is defined as a kind of operational costs on mutual funds, charged by the AMC (Asset Management Company), to the investors. These charges are applicable on both the Regular Plan of Mutual funds and the direct plan of Mutual funds.
The concept of exit loads has now confined to a limited number of funds. Exit loads were a problem for those investors who wanted to withdraw their money before soon after they saw a good return or a big loss in their investments.
So basically, to make the investment much easy, SEBI (Security Exchange Board of India) the regulating body of mutual funds in India, came up with the idea of Total Expense ratio, to be applied instead of Exit Loads and Entry Loads.
Here the question is, do exit loads have no benefit at all or does it benefit in any way?
Is there an advantage in investing in funds with an exit load?
Exit Load concept restricts investors from sudden or panic redemption from their funds which eventually stops them from exiting their investment in the short-term. Ultimately it forces investors to stay invested for the long-term and indirectly helps them to create a good corpus.
Understand it through an example. Consider a Balanced Fund, which aims to provide capital appreciation from the equity portion, and stable income from the debt portion. This scheme still carries considerable risk, as the portion of equity could be as high as 75%. This is recommended only for investors with a healthy risk appetite and long term time horizon.
The fund managers of this kind of scheme would ideally want only long term investors to invest, who can stay invested for a long period, say the minimum for 3 years. Thus, the fund may impose an exit load of 1% for all redemptions done before 3 years. In such a case, the fund is not impacting liquidity directly but is discouraging investors from exiting before a period of 3 years.
The advantage of applying this 1% exit load on this fund would be, that all investors will remain aligned to a longer time horizon. This would be a comforting factor for the fund manager, enabling him to pick securities with such a thought in mind.
An exit load of 1% for redemption before three years of investment there would be no will ensure that short term investors or sudden redemptions that may impact a long term strategy.
So basically, exit load in long-term investment funds can be proven useful, as it will avoid sudden redemption from the investor’s side and a good strategy followed from the fund manager side that would enable better fund performance and yield good returns.
Although exit load in long-term mutual funds can be beneficial, it is advised to investors choose funds as per your comfortability and requirements.