Why did SEBI abolish entry load?

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.

If exit load goes back to the scheme, who actually loses money?

The redeeming investor pays the exit load, and the money goes back into the scheme's assets, slightly increasing the NAV. So the remaining investors benefit marginally. The exit load acts as a deterrent against short-term redemptions and compensates long-term investors for the disruption caused by premature exits. The AMC does not benefit from exit load — it is purely a scheme-level charge.

Is exit load charged on SIP redemptions differently?

Exit load on SIP investments is applied on a FIFO (First In First Out) basis. Each SIP installment is treated as a separate purchase with its own holding period. For example, if an investor started a monthly SIP 14 months ago, only the first two installments have completed 1 year and are exit-load-free. The remaining 12 installments are still within the exit load period. This is an important point to clarify for clients who assume that once their SIP crosses 1 year, all units are exit-load-free.

Do all mutual fund schemes charge exit load?

No. Several scheme categories have no exit load: overnight funds, some liquid funds (after 7 days), ELSS funds (3-year lock-in replaces exit load), and some close-ended schemes. Even among schemes that charge exit load, the percentage and holding period vary widely. Always check the scheme's SID or factsheet for the exact exit load structure.

Can exit load percentages change after an investor has invested?

Yes, the AMC can change exit load structure with prospective effect (for new investments). However, the exit load applicable at the time of the original investment will apply to that investor's redemption — changes cannot be applied retrospectively to existing investors. If the AMC increases exit load, it must give 3 days notice to investors through its website and newspaper advertisement.

NAV, Expenses & Pricing (4/7)

Topic 4 of 7~5 min read

Entry Load (Abolished) & Exit Load — Impact on Returns

Definition

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.

In Simple Words

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.

Real-Life Scenario

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.

Key Points to Remember

Entry load was abolished by SEBI effective August 1, 2009 — no mutual fund in India can charge entry load anymore

Before abolition, entry load was typically 2.00% to 2.25% and was used to pay upfront commission to distributors

After entry load abolition, 100% of the investor's money gets invested in the scheme from day one

Exit load is charged on early redemption and varies by scheme — check the Scheme Information Document (SID) for specific exit load structure

Common exit loads: Equity funds — 1% if redeemed within 1 year; Liquid funds — graded exit load (0.0070% to 0.0045%) for redemption within 1 to 7 days; ELSS — no exit load (3-year lock-in serves the purpose); Index funds — typically 0.25% within 7 to 15 days

Exit load amount is credited back to the scheme (not the AMC) — it benefits the remaining investors by increasing the NAV slightly

For liquid funds, SEBI introduced graded exit load in 2019: Day 1 — 0.0070%, Day 2 — 0.0065%, Day 3 — 0.0060%, Day 4 — 0.0055%, Day 5 — 0.0050%, Day 6 — 0.0045%, Day 7 onwards — Nil

No exit load is charged on switch transactions between options (Growth to IDCW) within the same scheme

Formula

Redemption Proceeds = (Redemption Value) - (Redemption Value x Exit Load %)

Numerical Example

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

Test Your Knowledge

4 questions to check your understanding

Question 1 of 4Score: 0/0

SEBI abolished entry load for mutual fund schemes effective from:

Summary Notes

Entry load was abolished by SEBI on August 1, 2009 — this is a frequently tested NISM fact; before abolition, entry load of 2-2.25% was deducted upfront from the investment amount

Exit load is charged on premature redemptions and goes back to the scheme (not the AMC) — typical equity fund exit load is 1% within 1 year

For SIPs, exit load is calculated on FIFO basis — each installment has its own 1-year holding period clock

Liquid funds have graded exit loads for redemption within the first 7 days; ELSS has no exit load due to the mandatory 3-year lock-in

Always check the Scheme Information Document (SID) for the exact exit load structure of any scheme before recommending to clients

What you’ll learn in NAV, Expenses & Pricing

Learn how NAV is calculated, understand Total Expense Ratio (TER) and the new BER framework under SEBI 2026 regulations, exit loads, cut-off timings, and pricing mechanisms. Key numerical concepts for the NISM VA exam.

1What is NAV? — Calculation & SignificanceNet Asset Value (NAV) is the per-unit market value of a mutual fund scheme, calculated by dividing the total net assets of the fund (total assets minus total…2Mark-to-Market & Fair Valuation PrinciplesMark-to-Market (MTM) is the accounting practice of valuing securities held by a mutual fund at their current market price rather than their purchase price…3Total Expense Ratio (TER) — Direct vs Regular PlansTotal Expense Ratio (TER) is the annual percentage of a mutual fund scheme's average daily net assets that is charged to the scheme to cover all operating…4Entry Load (Abolished) & Exit Load — Impact on ReturnsA load is a charge levied by a mutual fund scheme on investors at the time of entry (subscription) or exit (redemption).5How Fund Houses Calculate NAV DailyDaily NAV calculation is the process by which mutual fund houses determine the per-unit value of each scheme at the end of every business day.6Cut-off Timing — When Does Your NAV Apply?Cut-off timing in mutual funds refers to the time deadline before which an investor must submit a valid purchase (subscription) or sale (redemption) request…7NAV, TER and Pricing in Segregated PortfoliosA segregated portfolio (commonly known as side-pocketing) is a mechanism introduced by SEBI in December 2018 that allows mutual fund schemes to separate…

Frequently asked questions

Does a fund with ₹10 NAV mean it is a new fund and therefore risky?

Not necessarily. A NAV of ₹10 usually indicates the fund is in its NFO stage or recently launched. However, NAV alone does not indicate risk — the risk depends on the underlying portfolio (equity, debt, hybrid), the fund manager's strategy, and market conditions. Always evaluate the scheme information document (SID), portfolio composition, and fund house track record before investing.

Why does NAV change every day?

NAV changes daily because the market value of the securities held by the fund changes every trading day. Equity prices fluctuate based on market forces, debt securities are revalued based on yield movements, and accrued income and expenses change. Since SEBI requires end-of-day NAV calculation, these changes are reflected in the updated NAV published after market hours.

Can NAV of a mutual fund go below zero?

No, NAV cannot go below zero. Since mutual funds invest in regulated securities traded on exchanges, even in extreme market crashes, asset values do not go to zero (unlike individual stocks of bankrupt companies). The lowest theoretical NAV would be close to zero if all holdings became worthless, but this has never happened in the history of Indian mutual funds.

Is NAV the same as the market price of an ETF?

No. For regular mutual funds, investors transact at NAV. But for ETFs (Exchange Traded Funds), there are two prices: the NAV (calculated end-of-day based on holdings) and the market price (the price at which ETF units trade on the exchange during market hours). The market price can be at a premium or discount to NAV depending on demand and supply.

When an investor receives dividends, does the NAV change?

Yes. When a mutual fund declares and pays a dividend (now called IDCW — Income Distribution cum Capital Withdrawal), the NAV drops by the dividend amount on the ex-dividend date. For example, if NAV is ₹50 and the fund declares ₹3 per unit as IDCW, the NAV will drop to approximately ₹47 on the record date. This is not a loss — the investor receives the ₹3 separately.

What happens if a security is not traded on a given day — how is it valued?

If an equity security is not traded on a particular day, it is valued at the last available closing price on the exchange. If it has not traded for more than 30 days, it is classified as a non-traded/thinly traded security and must be valued using fair valuation methods approved by the AMC's valuation committee. For debt securities, AMFI/CRISIL matrices provide daily valuations regardless of whether the security traded that day.

Why did SEBI introduce mark-to-market for debt funds?

Before MTM norms, some debt funds were valuing securities at "amortized cost" — essentially showing a smooth, straight-line return regardless of market conditions. This masked the true risk. When a credit event occurred (like IL&FS default in 2018), the sudden shift to market-based valuation caused sharp NAV drops. SEBI mandated MTM to ensure daily NAV transparency and prevent funds from hiding losses until a crisis erupted.

Does MTM apply to liquid funds as well?

Yes. From October 2019, SEBI mandated that liquid funds must value all securities with maturity above 30 days using MTM valuation. Earlier, liquid funds used amortization for securities up to 60 days maturity, which masked short-term volatility. Now, even liquid fund NAVs can show minor daily fluctuations due to MTM.

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