Entry Load (Abolished) & Exit Load — Impact on Returns
A load is a charge levied by a mutual fund scheme on investors at the time of entry (subscription) or exit (redemption). Entry load was a fee charged when an in...
Entry Load (Abolished) & Exit Load — Impact on Returns
A load is a charge levied by a mutual fund scheme on investors at the time of entry (subscription) or exit (redemption). Entry load was a fee charged when an investor purchased units of a mutual fund, typically 2.00% to 2.25%, which was deducted from the investment amount. SEBI abolished entry load effective August 1, 2009, to make mutual fund investments more transparent and cost-effective. Exit load is a fee charged when an investor redeems (sells) units before a specified holding period, designed to discourage premature withdrawals and protect long-term investors. Exit load collected goes back to the scheme (credited to the fund's NAV), not to the AMC.
Understanding the full history of loads is important because NISM frequently tests entry load abolition. Before August 2009, when an investor put ₹1 lakh in a mutual fund with 2.25% entry load, only ₹97,750 was actually invested — ₹2,250 went as entry load (which was mostly used to pay distributor upfront commission). This meant the investor was already at a loss on day one. SEBI abolished this under then-Chairman C.B. Bhave, arguing that investors should not bear the cost of distribution. After abolition, 100% of the invested amount gets invested. Distributors now earn through trail commission built into BER instead of upfront commission. Exit load still exists and serves an important purpose — it discourages short-term trading in schemes designed for long-term investing. The most common exit load is 1% if equity fund units are redeemed within one year of purchase. For example, if an investor puts ₹1 lakh and redeems within 12 months when the value is ₹1.10 lakhs, the exit load is 1% on ₹1.10 lakhs = ₹1,100. The redemption proceeds become ₹1,08,900. The key point for the exam: exit load goes back to the scheme, not to the AMC. This means the remaining investors in the fund actually benefit when someone pays exit load. Note: Under the SEBI 2026 regulations, the additional 5 basis points TER allowance previously permitted for schemes with exit load has been removed.
A Practical Example
Case Study: Anita, a 38-year-old doctor in Chennai, invested ₹3 lakhs in an equity mutual fund on March 15, 2024. The scheme had an exit load of 1% if redeemed within 1 year. On November 20, 2024 (8 months later), she needed ₹2 lakhs urgently for her clinic renovation. Her investment had grown to ₹3.30 lakhs.
She redeemed ₹2 lakhs worth of units:
• Exit load = 1% of ₹2,00,000 = ₹2,000
• Net redemption amount = ₹2,00,000 - ₹2,000 = ₹1,98,000
• The ₹2,000 exit load went back to the fund (not to the AMC), slightly boosting NAV for remaining investors
Had Anita waited until March 16, 2025 (after completing 1 year), there would have been zero exit load. A good distributor would have advised her to explore a loan against mutual funds or redeem from a liquid fund instead to avoid this ₹2,000 charge.
What Makes This Important
Mathematical Formula
Redemption Proceeds = (Redemption Value) - (Redemption Value x Exit Load %)
Step-by-Step Calculation
Scenario: Vikram invested ₹5,00,000 in an equity fund on January 10, 2024, at NAV of ₹50. Units allotted = ₹5,00,000 / ₹50 = 10,000 units Case 1 — Redemption within 1 year (October 15, 2024): Current NAV = ₹56 Redemption value = 10,000 x ₹56 = ₹5,60,000 Exit load = 1% of ₹5,60,000 = ₹5,600 Net redemption amount = ₹5,60,000 - ₹5,600 = ₹5,54,400 Effective return = (₹5,54,400 - ₹5,00,000) / ₹5,00,000 = 10.88% (in ~9 months) Case 2 — Redemption after 1 year (February 15, 2025): Current NAV = ₹58 Redemption value = 10,000 x ₹58 = ₹5,80,000 Exit load = 0% (holding period > 1 year) Net redemption amount = ₹5,80,000 Effective return = (₹5,80,000 - ₹5,00,000) / ₹5,00,000 = 16.00% (in ~13 months) The ₹5,600 exit load in Case 1 went back to the scheme, benefiting remaining unitholders.
Frequently Asked Questions
SEBI abolished entry load in August 2009 to protect investor interests. The entry load was primarily used to pay upfront commissions to distributors, which meant investors were losing 2-2.25% of their investment on day one. SEBI determined that the cost of distribution should not be borne by investors upfront. Post-abolition, distributors earn through trail commission built into the BER (Base Expense Ratio) component of TER, which aligns their interest with long-term investor wealth creation.
🧠 Quick Quiz
4 questions to check your understanding