How an Exit Load Changes What a Redemption Pays Out

A load is a deduction the scheme takes out of a redemption under terms it has written for itself. The percentage is applied to what the cancelled units are worth on the day, not to the money handed over when they were bought and not to any profit sitting inside them. So the payment shrinks and the unit count does not move at all.

The part that trips people is not the idea. Almost nobody struggles with the sentence "a percentage comes off on an early exit". The quiet failure is different. Two readers silently choose different quantities to apply the identical percentage to, run it against the identical transaction, and hand back rupee figures that differ by a factor of nearly eight. A percentage of what, exactly. One question, asked slowly, settles every rupee of the answer.

One holding runs through every block below. Girnar Asset Management Limited, an invented house, operates the Girnar Large Cap Equity Fund, an open ended equity scheme whose net assets are Rs 4,200 crore against 120.00 crore units in issue. Divide the first by the second and one unit is worth Rs 35.00, a division covered separately and used here rather than rebuilt. A holder put Rs 1,00,000/- in and was allotted 2,857.143 units. Kalyani Bhagat manages the portfolio and Sohail Merchant heads operations.

Three things arrive already settled and none of them is reopened here. The first is what a redemption is and what a switch is. The second is the rule that decides which struck value per unit a request meets. The rule turns on when the instruction and the money reach the scheme, and the Securities and Exchange Board of India (SEBI) both sets it and revises it. The third is the convention that records unit counts to three decimal places. All three are taken as given here, and one new thing is done with them: settling the quantity a redemption charge is applied to and then following the rupees all the way to the bank account.

What is an exit load, and whose terms decide it?

An exit loadA deduction a scheme makes from a redemption where the units being cancelled have not been held for as long as that scheme's own written terms require. is a deduction the scheme itself makes from a redemption when the units being cancelled were allotted more recently than the scheme's own written terms allow. Two things decide whether it applies at all: how long the units have been sitting there, and what the scheme has committed to in its own documents. Neither of those is a market convention and neither is a rule of thumb anybody can quote from memory.

Think of a community hall that a residents' association lets out. The association's own bye laws say that a booking withdrawn close to the date forfeits a slice of the money. A different association down the road forfeits a different slice, or none. A resident who wants to know what withdrawing will cost them does not ask a neighbour, and does not read a general article about hall bookings. The bye laws of their own association are the terms that actually bind their own booking, so the bye laws are what the resident reads. The rate a scheme charges on an early exit and the length of time it charges over are that scheme's own stated terms, written into its own documents, and no general description of how loads work can tell any holder what their own redemption will meet.

Sitting above those terms is a separate layer. SEBI decides whether such a charge may be made at all, whether there is any ceiling on it, what conditions attach to it and what has to happen to the money once it has been deducted. SEBI's instructions are consolidated, published and revised. A figure of that kind does not go stale gently: it becomes wrong on the day it is changed, and a reader who trusted it is worse off than a reader who was sent to look. Read the current position at sebi.gov.in.

Which quantity is the deduction applied to, and which two is it not?

The deduction is applied to the redemption valueThe unit count leaving the folio, priced at whatever value per unit the instruction lands on. Name both halves or the product means nothing., meaning the unit count leaving the folio priced at whatever value per unit the instruction lands on. The deduction is not applied to the rupees that went in when the units were bought. The deduction is not applied to the profit either. Money handed over and profit made are wrong in a specific way that costs money rather than merely being untidy.

The confusion is durable because the reflex was learned somewhere it genuinely works. Plenty of charges in finance really are computed on the sum somebody put in. Plenty of others really are computed on what somebody made. So a holder reaching for one of those two is not being careless; they are applying a habit that has served them everywhere else. Nothing on the payment advice announces that the habit stops working here. A percentage quoted without naming its baseThe quantity a percentage is applied to. Change the base and the identical percentage yields a different rupee figure, so a percentage quoted alone can never be checked. is not a figure anybody can check, and naming the base is the single habit that matters most here.

Watch what the three candidates do to one transaction. Hold the units at 2,857.143 and the money handed over at Rs 1,00,000/-, and let the value per unit stand at Rs 40.00. One per cent is assumed from this point on, purely so the arithmetic can be seen working. The assumed rate is not a ceiling, not a norm and not anybody's standard, and it stands in for a figure only the scheme's own documents can supply. The redemption value is 2,857.143 times Rs 40.00, or Rs 1,14,285.72. One per cent of that is Rs 1,142.8572, or Rs 1,142.86 once it is stated to the paisa. One per cent of the Rs 1,00,000/- handed over is Rs 1,000.00 flat. The gainWhat a redemption is worth now, measured against the money handed over to buy those units in the first place. is Rs 1,14,285.72 less Rs 1,00,000/-, or Rs 14,285.72. One per cent of the gain is Rs 142.8572, or Rs 142.86 stated to the paisa.

One rate, one transaction, one holder, and three answers that run from Rs 142.86 to Rs 1,142.86, with the largest 7.99999 times the smallest. Rounding that ratio to eight is the same kind of shortcut at issue throughout, so the ratio is worth stating precisely. The exact ratio is Rs 1,142.8572 over Rs 142.8572, or 7.99999 and change, just short of eight and never equal to it. The three figures are not three opinions. Two of them are simply answers to a question nobody asked.

Does a load take units away, or does it take rupees away?

Rupees, and only rupees. Follow the order of operations and it becomes obvious rather than memorable. The holder's instruction fixes the unit count first. The scheme then values those units. Only then is the deduction computed and taken out of the money. Nothing anywhere in that sequence goes back and cancels an extra unit to pay for the charge.

Take the holder's 2,857.143 units in the Girnar Large Cap Equity Fund and suppose a redemption of 1,428.571 of them, as close to half the holding as three decimal places allow. Half of 2,857.143 units is 1,428.5715, and a record that stops at three decimals cannot hold that last half thousandth, so the request rounds down to 1,428.571 and the other half comes to 1,428.572. The 1,428.571 units leaving at Rs 35.00 are worth Rs 49,999.985 exactly. The assumed one per cent is Rs 499.99985, and Rs 49,499.98515 is left, or Rs 49,499.99 stated to the paisa. The holding afterwards is 2,857.143 less 1,428.571, or 1,428.572 units. The deduction never touched the unit column at all, so 1,428.572 units is exactly what the request left and not one thousandth less.

The wrong phrasing produces the wrong mental model, and the wrong mental model produces the wrong expectation at the bank. So the phrasing readers get wrong is worth naming out loud. A redemption charge does not eat into a holding and does not shave units off it. The charge comes out of what the redemption pays, and the holding falls by precisely the number of units that were asked for and by nothing else. If a holder wants to know what their remaining holding is after a redemption, they do the subtraction in units and the charge never enters it.

Why do two different percentages both describe the same deduction honestly?

Go back to the full holding and redeem all 2,857.143 units at Rs 35.00. The redemption value is Rs 1,00,000.005, and the figure deserves a sentence of its own before anything is deducted from it. The redemption value sits half a paisa above the Rs 1,00,000/- the holder handed over, and the half paisa has nothing whatever to do with any charge. The half paisa is the residue from the original allotment: Rs 1,00,000/- divided by Rs 35.00 is 2,857.142857 and onwards without ending, the three decimal convention rounded that up to 2,857.143, and rounding up gave the holder a sliver more unit than the money strictly bought. A rounding whose direction goes unstated is an invitation to disagree by a paisa later, so every rounding worked below carries the direction it went.

Now the assumed one per cent. One per cent of Rs 1,00,000.005 is Rs 1,000.00005, or Rs 1,000.00 stated to the paisa, rounded down by one two hundredth of a paisa. The remainder is Rs 1,00,000.005 less Rs 1,000.00005, or Rs 99,000.00495 exactly, and Rs 99,000.00 stated to the paisa, rounded down by just under half a paisa. So the holder receives Rs 99,000.00 in proceedsThe money that actually lands in the holder's bank account once the deduction has been taken out of the redemption value..

One question makes the base habit stick. Rs 1,000.00 came out and Rs 99,000.00 went in. Is that a one per cent charge or a 1.0101 per cent charge? Both, and neither answer is a fudge. The redemption value is the quantity the rate was applied to, so measured against the redemption value the charge is exactly 1.00 per cent. Measured against what actually arrived the charge is Rs 1,000.00 over Rs 99,000.00, the fraction one ninety ninth, or 100/99 per cent written exactly. The fraction runs to 1.010101 recurring, and 1.0101 per cent is only a convenience. Two correct percentages for one deduction is not a paradox, it is proof that a percentage with no base attached carries no information at all.

There is a trap folded into that table, and it is the reason the rounding directions were written into it. Subtract exactly and then round, and the answer is Rs 99,000.00 with nothing to argue about. Round the deduction to Rs 1,000.00 first and then subtract, and the arithmetic lands on Rs 1,00,000.005 less Rs 1,000.00, or Rs 99,000.005, sitting exactly halfway between two paise. Rounding that half paisa upwards gives Rs 99,000.01 and rounding it downwards gives Rs 99,000.00, so two people following the same instructions in a different order disagree by a whole paisa, and neither of them has made a mistake. The disagreement is not in the arithmetic, it is in an unstated convention, and it exists on this transaction because the allotment rounded up by exactly half a paisa in the first place.

What happens when the instruction names rupees rather than a unit count?

A redemption instruction can be written two ways and they behave differently under a deduction. Writing it by unitsAn instruction written as a number of units, which pins the unit count and leaves the money to be worked out afterwards. pins the unit count and lets the money land wherever it lands. Writing it by amountAn instruction written in rupees, which pins the money wanted and leaves the unit count to be worked out backwards from it. pins the money and forces the unit count to be solved backwards. With no charge in the way the two are just mirror images. With a charge in the way they stop being mirror images, and the difference between them is the most useful number here.

Run it through the Girnar Large Cap Equity Fund with one unit worth Rs 35.00 and the assumed one per cent still in place. The by units request was 1,428.571 units, and it paid Rs 49,499.98515, or Rs 49,499.99 to the paisa. Now ask instead for Rs 50,000.00 to arrive. Each unit cancelled is worth Rs 35.00 and the deduction takes one per cent of that, so each unit contributes Rs 35.00 times 0.99, or Rs 34.65, to the payment. To raise Rs 50,000.00 the scheme needs Rs 50,000.00 divided by Rs 34.65, running 1,443.001443 and onwards without ending, and 1,443.001 units once the three decimal record has taken it.

Set the two requests side by side: 1,428.571 units against 1,443.001 units, a difference of 14.430 units. The extra 14.430 units are the identical deduction counted in units instead of in rupees, and they are the reason the by amount route quietly cancels more of the holding than a holder expecting a clean half exit would have guessed. The holder did not pay a bigger charge. The holder simply asked a question whose answer had to absorb the charge before it could be Rs 50,000.00.

Now a warning about a number that looks like a confirmation and is not one. The figure 14.430 over 1,428.571 comes out at 1.010100 per cent. Earlier the deduction came to 1.010101 recurring per cent of the money received. Holding those two figures up as agreeing, and treating the agreement as a check, is tempting. The two figures are one identity written twice, so the agreement is not a check at all. The payment is 0.99 times the redemption value, so recovering a wanted payment means dividing by 0.99, so it means multiplying by 100/99, so it means adding one ninety ninth, and one ninety ninth is where both figures come from. An identity rearranged cannot disagree with itself, so it can never fail, so it can never confirm anything either.

Notice too that the two are not even numerically the same here. The mismatch is a small mercy, and it stops the coincidence looking convincing. One ninety ninth is 1.010101 recurring per cent. The exact gross up of 1,428.571 units is 1,428.571 times 100/99, running 1,443.001010 and onwards. The three decimal record clipped it to 1,443.001, and the ratio of the two recorded unit counts is therefore 1.010100 per cent rather than 1.010101 recurring. The gap is the rounding, not the arithmetic.

So here is a check that can actually fail, and therefore actually means something. Take the 1,443.001 units and run them forward through the whole chain without looking back at where they came from. The redemption value is 1,443.001 times Rs 35.00, or Rs 50,505.035. The assumed one per cent of that is Rs 505.05035, or Rs 505.05 to the paisa. The remainder is Rs 50,505.035 less Rs 505.05035, or Rs 49,999.98465, and Rs 49,999.98 to the paisa. The forward run does not land on Rs 50,000.00, it lands one and a half paise short, and the fact that it can miss is exactly what makes it worth running.

Can three decimal places really put a round figure out of reach?

Three decimal places can do exactly that, and being honest about it is more useful than pretending the arithmetic is tidier than it is. A unit count is recorded to three decimal places, so the payment a redemption can produce moves in steps rather than sliding smoothly. Between one attainable payment and the next there is a gap, and any figure inside that gap simply cannot be paid by any instruction written in units.

The step here is easy to measure. 1,443.001 units pay Rs 49,999.98465, or Rs 49,999.98 to the paisa. Go up one thousandth of a unit to 1,443.002 and the redemption value becomes Rs 50,505.07, the assumed one per cent is Rs 505.0507, and Rs 50,000.0193 remains, or Rs 50,000.02 to the paisa. Rs 50,000.00 exactly sits inside that gap, one and a half paise above what the lower unit count pays and nearly two paise below what the higher one pays, so no instruction written in units can put exactly Rs 50,000.00 into the account.

There is a quiet detail in those two rows that is worth pausing on. Both unit counts produce the same deduction once it is stated to the paisa: Rs 505.05035 and Rs 505.0507 both round to Rs 505.05. So the two instructions differ by three and a half paise in what they pay while agreeing exactly on what was charged. A holder comparing two statements and finding an identical charge against two different payments has not found an error; they have found the granularity of the record. Which of the two the scheme actually uses is decided by that scheme's rounding conventionA scheme's own practice for recording unit counts to three decimal places and for stating money to the paisa, which quietly settles the final paisa of a payment., a practice written into its documents rather than a property of the arithmetic.

What happens to all three candidate bases when the value per unit moves?

The three answers at Rs 40.00 were not three fixed numbers, they were three functions of one variable, and watching them move turns the point from a sentence to agree with into something visible. As the value per unit below is moved, the three bars behave differently. One of them refuses to move at all. The money handed over was fixed the day the units were bought, and no later price can change it. One of them tracks the value per unit in a straight line, being simply one per cent of what the units are worth. And one of them is nothing at all until the value per unit passes the point where the holding is worth what was paid for it, then climbs faster than either.

Two positions deserve to be written out in prose as well, and they outlive the slider. At Rs 35.00, the one struck value the scheme has actually reported, the redemption value base and the money handed over base both produce Rs 1,000.00 and cannot be told apart. The gain base at that same point produces Rs 0.00005, or Rs 0.00 once it is stated to the paisa. At Rs 40.00 the three separate cleanly into Rs 1,142.86, Rs 1,000.00 and Rs 142.86. Below Rs 35.00 the ordering flips: at an assumed Rs 25.00 the redemption value base gives Rs 714.29 while the money handed over base still gives Rs 1,000.00, so the base that produced the largest figure at Rs 40.00 produces the smallest of the two at Rs 25.00. There is no fixed ranking to memorise, and that is precisely why the base has to be named rather than guessed.

Where else does a load reach besides a plain exit?

A redemption charge does not recognise instructions. A redemption charge recognises redemptions. So the honest way to work out where it can reach is to stop asking what an instruction is called and start asking where a redemption is hiding inside it. Put that way, two places show up that a holder rarely thinks of as exits at all.

The first is a switch. Moving a holding from the Girnar Large Cap Equity Fund into the Girnar Broad Market Index Fund is written and described as one movement, and it feels like one. Structurally it is two. Units are cancelled and valued on the leaving side, and the money that comes out buys units on the arriving side. The leaving side is a redemption in every respect that matters here: units cancelled, a value per unit attached, a payment computed. The leaving leg is a plain exit with the money pointed at another scheme instead of at a bank account, so a deduction meets that leg exactly as it meets a plain exit.

The second follows from the first and is the consequence readers miss most often. A standing instruction that transfers a fixed amount from one scheme to another on a repeating basis is not one switch registered once. A standing instruction is a switch performed afresh on every occasion, each occasion with its own leaving leg and its own valuation. An instruction registered to run over twelve occasions therefore contains twelve redemptions, not one. A deduction can meet each of those twelve independently, and nothing about the instruction being registered once makes the deduction happen once. None of that is a new rule; it falls straight out of what the switch and the standing instruction already established earlier in this sequence.

Where does the deducted amount end up after it leaves the payment?

The question has a clean structural shape and an answer that is settled elsewhere, so care is needed at this step. Structurally there are exactly two places an amount taken out of a redemption can go. The amount can stay inside the pool, in which case it is still there when the value per unit is next struck and it belongs to the people who did not leave. Or it can pass out of the pool to a party outside it, in which case the holders who stayed never see it at all.

The two endings are not near neighbours. Under the first, the person leaving has made a transfer to everybody who stayed, and that is why the charge is sometimes explained as a way of stopping a quick exit from imposing a cost on the rest. Under the second, nobody who stayed is compensated for anything and the amount has simply left. The same rupee figure on the same payment advice describes two structurally different events, and the holder paying it cannot tell from the payment advice which one has happened.

SEBI decides which of the two it is, and a scheme repeats that decision in its own documents. Where the deducted amount goes sounds like something any reasonably informed person would simply know, and it is exactly the kind of claim people make from memory with complete confidence, get wrong, and go on repeating for years. Read the current position at sebi.gov.in and read the particular scheme's own documents alongside it.

Why is no rate and no period stated here at all?

Because two different kinds of question get tangled together, and untangling them is what lets an account be useful now and still be correct much later. One of them is a question about structure, and structure can be reasoned about. The other is a question about limits, and limits can only be read.

Here is the structural half, worked rather than asserted. When a holder redeems, the scheme has to find the cash. Finding cash means selling something, or holding cash that could have been invested, and either of those has a cost. The cost of finding that cash lands somewhere. If the person leaving does not carry it, it stays in the pool and is carried by the holders who did not leave, who did nothing and asked for nothing. So there is a coherent structural reason why a scheme might attach a charge to an early exit, and that reason can be followed all the way through without knowing a single number. Notice what that reasoning is and is not: it explains why such a charge can exist, and it says nothing whatever about whether any holding should be redeemed, kept or moved. A redemption charge is not a punishment, it is not an argument for staying, and it is not an argument for leaving; it is an amount that comes off a payment under stated terms.

Here is the half that cannot be reasoned about. Whether such a charge may be made at all, whether there is a ceiling on it, over what stretch of holding it may apply, how that stretch is counted and what has to become of the money afterwards are all fixed by SEBI, revised by SEBI and published by SEBI. There is no structural argument that yields any of those. A figure printed for any of them would carry an expiry date that goes unannounced. The shape of the mechanism and the arithmetic against an openly assumed rate can be set out instead, with every limit read at sebi.gov.in, where the current answer actually lives.

What does the whole redemption look like when it is run end to end?

Here is every step in one place on the Girnar Large Cap Equity Fund, at the full holding, with each rounding direction written into the row rather than left for the reader to guess. The rate of 1.00 per cent is assumed throughout and is stamped as an assumption on the row that uses it. The residues are where two honest people end up disagreeing, so read the residue rows as carefully as the result rows.

Two of those rows agree with each other for a reason that is not evidence of anything: subtracting one per cent and multiplying by 0.99 are the same expression written two ways, so their agreement is forced by algebra and confirms no arithmetic at all. The row that does the real work is the order check. The order check shows that rounding the deduction before subtracting lands on Rs 99,000.005, exactly half a paisa, and no convention resolves that without choosing one. Subtracting first and rounding once at the end lands on Rs 99,000.00495 and rounds down cleanly. Two operators following the same instructions in a different order will hand back Rs 99,000.00 and Rs 99,000.01, and the paisa between them came from an unstated convention rather than a mistake.

Girnar Asset Management Limited, the Girnar Large Cap Equity Fund, the Girnar Broad Market Index Fund, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.