We all grew up watching mutual fund ads and we still watch them. Our parents don’t want to hear about stock markets, cryptos, etc. but mention to them about mutual funds and they would talk about it all day. Saving money in banks and mutual funds has been the only two safe things that they know of and with so many bank scams that have happened in recent times, they now trust only mutual funds. In this article, we will break down every aspect of mutual funds and what makes them great. We also aim to look at exit load in mutual fund, how to use mutual fund exit load calculator and inform you about exit load in mutual fund after 1 year.
What do we mean by Exit Load in Mutual Fund?
We are a generation that grew up with the line mutual funds are subject to market risks and this is because that is all we know in the name of safe investments. Since mutual funds are so celebrated amongst a whole generation and our parents it makes us curious as to what phenomenon mutual funds exactly are. Let us begin with that.
What are Mutual Funds?
Simply put, a mutual fund is an investment scheme. Let’s say you buy a share/stock, crypto, some commodity like gold, a piece of land, etc. at a cheaper price only to sell it at a higher price.
This is you making a profit from what can be considered an asset. However, when buying any of the assets mentioned above you are signing up for a significant risk factor because the prices of these assets may also plummet, and you might have to endure losses on them.
A mutual fund is an asset or an investment where the risk that lies upon you is as good as non-existent. You as an investor give a certain sum to a company with specialized people who take money from multiple people just like you, club it, and then use that money to trade it to make excessive profits.
It is no different from investing in equity or crypto, but in this case, your money is being dealt with by experts and you are promised fixed returns. So, you see mutual funds are the benefits of two assets mixed where you get to hold an asset for a fixed period of time and in exchange you get minimum risk and guaranteed returns or profits making it a win-win situation.
Why Should You Invest in Mutual funds?
Mutual funds can be an incredibly attractive investment option because of the low risks attached to them. Guaranteed returns also add strong weight to the already strong reasons in favor of mutual funds. One should invest in mutual funds because it has many advantages, some of which are as follows:
Help of Experts
Your money is being looked after by professionals. There is a team of dedicated members who study securities for you and monitor your money’s movement and that should lessen any worries that you might have.
Multiple Eggs Multiple Baskets
There is always this saying going on about not putting all your eggs in one basket and that is exactly what mutual funds do. When you invest in them, your funds are split and invested in various companies across industries and this, in turn, lowers the chances of incurring a loss.
Economic & Affordable
Spending money on investments can be a luxury that not everyone can afford. However, when we talk about mutual funds, we are talking about an investment option that is not only affordable initially but also when making subsequent investments and that is why it gets so many people on board.
As good as Cash
A lot of people are worried about running out of cash in hand. Requiring cash in hand is nothing new and while assets like property cannot be quickly turned into cash, mutual funds can easily be liquidated eliminating any cash problem that you may be staring at. The mutual fund gets squared off at the current net asset value and a redemption fee may be charged and you will have your cash almost instantly.
Also Read: 10 Best Stocks to Buy for Long Term in India
Types of Mutual Funds
Mutual funds in themselves are a diverse area. You are not limited by the umbrella term; there are multiple types of mutual funds that you can invest in. You might not know it but the four most common types of mutual funds that you can invest in are.
1. Money market funds
If risk-taking had you worried, money market funds come with an extra level of security. This is the type of mutual fund investment where your money can only be invested in certain high-quality investments that too for the short term. The assets are usually government-backed, which makes them more stable and your investment less risky.
2. Bond funds
These are those bonds that are a bit more risk-taking than money market bonds. Here you have the chance of earning higher profits and the money invested by you can be invested in different types of bonds. So, rewards can drastically vary when dealing with these types of mutual funds.
3. Stock funds
You can also invest in corporate stocks which have their own subdivisions. Firstly, you have growth funds that may not give regular dividends, but when they do, they are usually more than average returns. Next up you have Income funds that give a regular dividend. Then you have Index funds that work in sync with a particular market index. Lastly, there are Sector funds that work in sync with a particular industrial sector.
4. Target Date funds
Also known as Lifecycle funds, these are the mutual funds that usually target people who have a retirement date in near sight. This type of mutual fund combines bonds, stocks, etc. The mix of these assets keeps changing from time to time depending on the fund’s strategy.
Exit Load in Mutual Fund
Selling a share or crypto commands certain charges. Selling a property might see you making some payment or fee. Likewise, any and every asset comes with its way of making you pay some money in certain cases. With mutual funds, it’s no different.
When dealing in mutual funds the issue of being charged money comes in a situation when you are looking to cut short your investment. As mentioned above, you need to pay redemption fees when liquidating your mutual fund; this is what you call an exit load in mutual fund.
Exit load fee is a discouraging fee attached to a mutual fund to make the investors rethink their decision to exit a mutual fund investment wholly or partly before a prespecified period.
A mutual fund is a collection of funds of various people and to make sure that everything that happens is in the best interest of everyone, the company puts such a charge. Few companies may not have such a charge, or the percent or fee amount may vary. It’s always recommended to read and understand any such charges that may be a part of your contract.
Mutual Fund Exit Load Calculator
The mutual fund exit load calculator or the corresponding formula, used to determine the exit load on a mutual fund, is a bit complex for first-timers to understand. When calculating the exit load for your mutual fund, you need to keep two things in mind to be able to derive the formula for it.
You need to know the percent of fees charged as the exit fee at the net asset value and you need to calculate the exit load period or the time that has passed since you first purchased the scheme.
Once you have these two things, we can now proceed to look at the formula for calculating the exit load.
Exit Load in Mutual Fund After 1 Year
The formula for calculating exit load reads as:
the percent of the fee charged at NAV × number of units redeemed from the scheme × NAV.
Exit load in mutual fund after 1 year may be different for different schemes and different holders depending on various factors. Depending on the terms and conditions, NAV, number of units sold, etc. one can expect to be charged an exit load accordingly. With the formula mentioned above, you can calculate your exit load before you decide to exit from the scheme. Let us explain exit load in mutual fund after 1 year with an example.
For example: you are charged a 1% fee for withdrawing from the mutual fund within the first year. Now assume that you are selling 500 units from the scheme within 6 months of taking the scheme. Now let’s take the NAV to be 100. So, by using the formula mentioned above we come to the calculation looking something like this, 1%×500×100 which equals 500 rupees. So, for 500 units you will be charged rupees 500 in this case on withdrawing the sum within a year that has a NAV of 100.
Pros and Cons of Investing in Mutual Funds
Before investing in mutual funds it is important to understand if it’s really that great or if there are chinks in the armor. So here we look at the pros and cons of investing in mutual funds.
- For a mutual fund, you can pay a small fee and get a professional to look after your portfolio and this increases your chances of getting higher returns.
- When it comes to mutual funds, the dividends you earn can be reinvested. You can decide to use the sum earned to expand your portfolio and this way your investment can grow to bring you even bigger profits
- Your fund is split as much as possible with your money being used to buy as many as 200 different securities. In fact, in the case of stock index mutual funds, your fund can be split between as many as 1,000 individual stock positions.
- Mutual funds are affordable and are only traded once per day and so there is not much price fluctuation or situations to take advantage of arbitrage thus making them also a safe bet.
- Make sure to stay attentive and look after the expense ratios and sales charges of your mutual fund. Things can get out of hand pretty quickly and you may be left feeling hard done with.
- The manager of your funds may play their little tricks of the trade in certain unfavorable situations and that may further hurt your investments.
- Investing in mutual funds may also lead to situations of tax.
- Mutual funds can lead a person to have a poor trade execution which might hurt their portfolio.
We all know that fixed deposits, mutual funds, banks, etc. all these safe options don’t make us as excited as they did to our parents. And it is all down to the fact that today earning money needs to be quick which is why such slow methods don’t entice us anymore. However, if you are still the oddball and like safe investments then mutual funds might just be the right investment for you.
But before you go down this road, make sure to research thoroughly and learn everything about mutual funds. To be on the safer side, always go through terms and conditions and understand every little detail like the exit load in mutual fund.
Make sure to have knowledge about mutual fund exit load calculator prior to investing and always have a rough exit load in mutual fund after 1 year calculation chalked out to have an idea about what it will look like if things go south. Happy investing!