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