My mutual fund account statement says that if I redeem units within one year from the date of purchase, there would be a deduction of 1 per cent. What does this mean?
Most fund schemes discourage investors from making short-term investments. They charge an exit load or Contingent Deferred Sales Charge (CDSC) to restrict early withdrawals which can affect the gains of other investors in the fund.
Other investors stand to lose in case a fund is not able to meet the redemption requests with its cash holdings. In such a scenario, the fund manager will have to sell the socks held, sometimes even at a price lower than the purchased price. This results in losses and hence a fall in the NAV for remaining investors.
Exit load discourages short-term money. It is charged as a percentage of the full amount to be withdrawn. If one withdraws Rs 10,000 and the fund charges load at 1 per cent, the investor will have to pay Rs 100 as exit load.