Expense Ratio and Exit Load are the two important terms related to Mutual Funds. These are the costs in percentage that you have to pay your mutual fund company for its services.
Investing in mutual funds is a choice of many humans and is very common, especially in India. However, understanding the various aspects of mutual fund investments can be challenging or tuff for beginners.
That’s why, I am coming up with the explanation of two crucial terms that are related to mutual funds.
Two key terms that every mutual fund investor should be familiar with are Expense Ratio and Exit Load. These terms play a crucial role in determining the net returns from your mutual fund investments.
First, we see what these two terms are and what is the definition of these terms.
Expense Ratio
The Expense Ratio is a measure of the operational costs incurred by an AMC or mutual fund company, expressed in terms of the percentage of the fund’s average assets under management (AUM).
It includes expenses such as fund management fees, administrative costs, marketing, distribution expenses, etc.
The expense ratio is deducted from the fund’s gross return, reducing the return to investors.
Exit Load
The Exit Load is a fee charged by Asset Management Companies (AMCs) when investors exit or redeem their fund units. It is also shown in terms of percentage.
It is also called the commission to fund houses or exit penalty if an investor exits the fund in the lock-in period.
The exit load is usually a small percentage of the Net Asset Value (NAV) of the mutual fund units held by investors.
Comparison/Difference Between Expense Ratio & Exit Load
| Expense Ratio | Exit Load | |
|---|---|---|
| Definition | It is a fee charged by Asset Management Companies (AMCs) when investors exit or redeem their fund units. | It is deducted from the total NAV at the time of redemption, reducing the amount credited to the investor’s account. |
| Impact on Returns | It reduces the fund’s gross return, thereby reducing the return to investors. | Deducted from the total NAV at the time of redemption, reducing the amount credited to the investor’s account. |
| Purpose | It covers the operational and administrative expenses of managing the fund. | It discourages/stops the investors from prematurely exiting the fund. |
Suggested Read:- How to file ITR?
In the end, I only want to say that understanding the expense ratio and exit load is crucial for making investment decisions.
While the expense ratio gives you an idea of the ongoing costs associated with managing the fund, the exit load informs you about the costs of exiting the fund before the end of the stipulated period.
As an investor, it’s important to consider both these factors when choosing a mutual fund scheme to invest in. Remember, the lower the expense ratio and exit load, the higher your potential net returns.
Thanks & Regards
Vinay Garg
Source: Internet & My understanding as an investor