Decoding Exit Load and Lock‑In Period in Mutual Funds

When you invest in a mutual fund, there are a few important features beyond returns that you should understand — especially if you plan to redeem your investment at any point. Two of these features are exit load and lock-in period.

This blog debunks these two terminologies so you can make an informed decision before redeeming your mutual fund units.

What Is an Exit Load In Mutual Funds?

An exit load is a charge applied when mutual fund units are redeemed within a specified period. It is calculated as a percentage of the redemption value and is deducted before the pay-out is made.

Exit load applies only when mutual fund redemption is allowed. If a scheme permits redemption but the units are redeemed early, the exit load, if any, becomes applicable. The rate and period are defined upfront in the scheme documents.

Note: The maximum permissible exit load is regulated, with SEBI reducing it to a maximum of 3%.

How is Exit Load Calculated

Exit load is usually calculated with the formula given below:

Simple calculation:

Exit load = (Redemption amount × Applicable exit load %)

If a scheme charges an exit load of 1% and units worth ₹1,00,000 are redeemed within the exit load period, the exit load would be ₹1,000.

In most cases, this basic calculation works. Some schemes may also display the charge through a mutual fund exit load calculator.

Disclaimer: The above calculation is for illustration purposes only and should not be construed as an investment advice.

How Exit Load Is Applied

Exit load is charged as a percentage of the amount being redeemed. These are common practices followed by fund houses and are disclosed in scheme documents. They are not classified by SEBI or AMFI.

• In many schemes, exit load applies only for a fixed period. Once this period ends, no exit load is charged(usually termed as fixed exit load).
• Some schemes reduce the exit load as the holding period increases(usually termed as stepped exit load).
• Exit load applies only on the amount withdrawn, not on the entire investment.

It is also applied unit-wise, based on which units are redeemed. This is why exit load outcomes can differ for lump-sum investments, SIPs, and SWPs.

Why Mutual Funds Charge an Exit Load?

Exit loads in mutual funds exist to manage the impact of redemption. When investors redeem units soon after investing, the scheme may need to sell securities to arrange cash. This can create transaction costs and affect the scheme’s day-to-day operations.

By applying an exit load, the scheme accounts for these costs within the fund itself. This helps ensure that investors who stay invested are not affected by frequent or sudden redemptions by others.
Exit loads may also help align investor behaviour with the scheme’s intended holding period. Since mutual fund schemes are designed with a specific investment horizon in mind, early exits can disrupt portfolio management.

Please note: Any exit load charged is added back to the same mutual fund scheme. It is not kept by the fund house as income. This keeps the impact of early withdrawal limited to the scheme and its investors.

What Is a Lock-In Period in Mutual Funds?

A lock-in period is a scheme-defined restriction on mutual fund unit redemption. During this period, investors are not allowed to redeem their units, either fully or partially. A lock-in applies only if it is specified in the scheme documents. It is not a default feature of all mutual funds. Where applicable, the duration and conditions are clearly stated upfront.

The lock-in period begins from the date of investment. Until this period ends, the invested amount cannot be accessed, regardless of market performance or returns.

Where Lock-In Periods Are Commonly Seen in Mutual Funds?

Lock-in periods are not present in all mutual fund schemes. They are used only in specific categories, where restricted access is part of the scheme structure.

• Tax-saving mutual funds, commonly referred to as ELSS, have a mandatory lock-in period of 3 years. Investors cannot redeem their units before this period ends.
• Lock-ins are also seen in closed-ended mutual fund schemes. These schemes are launched for a fixed tenure and allow redemption only at maturity. In some cases, limited exit options may be available through stock exchange listing, but this does not remove the lock-in condition.

Outside these categories, most open-ended mutual fund schemes do not have a lock-in period, though they may apply exit loads for early withdrawals.

Why an Exit Load Does Not Mean a Lock-In Was Broken?

A common misconception is that if an exit load is charged at the time of redemption, it means a lock-in period was not followed. This is not the case.

A lock-in period is a complete restriction on withdrawal. When a lock-in applies, redemption is not permitted at all until the specified period ends. Since withdrawal itself is not allowed, an exit load cannot apply during this time.

Exit load in mutual funds comes into play only when redemption is allowed. If a scheme permits withdrawal but the units are redeemed before a defined holding period, an exit load may be charged. This charge applies regardless of whether a lock-in exists.

How Exit Load Applies to SIP Investments?

A Systematic Investment Plan (SIP) is way of investing, where you invest in a scheme on a periodic basis, mostly monthly. Exit load does not apply when SIP instalments are made. 

Each SIP instalment is treated as a separate investment with its own holding period. When units are redeemed, the scheme looks at how long the specific units being withdrawn were held.