What is mutual fund redemption and how to redeem fund units?

Mutual funds provide an accessible way for individuals to invest in diversified portfolios. However, knowing how to withdraw your invested amount is just as important. This process, called redemption, enables investors to sell their mutual fund units and receive the corresponding amount in cash. This blog explains the mutual fund redemption process in India, detailing its key aspects and the necessary steps. It covers various types of redemption, tax implications, and essential factors to consider before making a redemption request, helping you make well-informed investment decisions.

• Table of contents

1. What is mutual fund redemption?
2. Things to remember before redeeming mutual funds
3. Reasons for mutual fund redemption
4. How to redeem mutual funds?
5. Is mutual fund withdrawal different than selling stocks?
6. What are the types of redemption?
7. Mutual fund redemption process
8. Exit loads associated with redemption
9. When should you consider redeeming your fund units?

What is mutual fund redemption?

Mutual fund redemptions are initiated by investors who choose to sell a certain quantity of units from their mutual fund investment. Usually, the investor's financial objectives, liquidity requirements, or market circumstances determine when and how much to redeem.

Redemption request: The mutual fund company or the appointed registrar and transfer agent of the fund receives a redemption request from investors. The quantity of units or amount to be redeemed is specified in this request.

Net Asset Value (NAV): The number of units redeemed, or the redemption amount, depends on the scheme’s Net Asset Value (NAV). If the redemption transaction is received before 3 pm on a business day, the NAV on the same date is considered. If it is received after 3 pm, the NAV of the next business day is considered.

NAV = {(Market or Fair Value of Scheme's Investment) + (Current Asset) - (Current Liabilities
and Provision)} / (Number of Outstanding Units Under the scheme)

Redemption proceeds: The redemption amount is obtained by multiplying the number of units redeemed by the applicable NAV. So, if the NAV is higher on a given day, the investor will receive a higher amount for the same number of units redeemed. Similarly, a lower NAV will result in a lower amount for the same number of units. The mutual fund house pays the investor the redemption proceeds after completing the redemption request.

Exit load: Investors who redeem their units within a certain holding period may be assessed an exit load by some mutual funds. Exit loads, which might fluctuate amongst mutual funds, are meant to deter short-term trading.

Tax repercussions: Profits from mutual fund redemptions may be subject to capital gains tax. The holding duration and the kind of mutual fund (debt or equity) affect the tax treatment.

Things to remember before redeeming mutual funds :

• Demands for liquidity: Investors often redeem their mutual fund units to finance certain financial objectives or to satisfy urgent liquidity demands.
• Market circumstances: Prevailing market circumstances may influence the choice to redeem mutual fund units. Investors may save investments to prevent bear market losses or realize gains in bull markets.
• Effect on portfolio: The redemption of mutual fund units impacts an investor's whole investment portfolio. It is important to consider the impact on financial objectives and asset allocation.
• When to redeem a mutual fund: The redemption amount depends on the applicable NAV at the cut-off time of 3 pm. A scheme’s NAV can change daily, so investors should be aware of the cut-off time to know when redemption requests must be submitted.

To make informed decisions about when to redeem funds, investors must know the redemption process. Investors must also align their redemption decisions with their financial goals and expenses. Tools like a mutual fund compound interest calculator can help investors evaluate the potential growth of their investments over time. This can encourage them to stay invested till they potentially meet their goals, instead of redeeming whenever they need funds Additionally, knowledge about associated costs, tax implications, and market circumstances can help investors choose a suitable time to redeem funds.

Reasons for mutual fund redemption

Here are some common reasons why investors may choose to redeem their mutual fund units:

• Fulfilling financial objectives: Investors may redeem their units to access funds for specific goals, such as a child's education, home purchase, or retirement planning.
• Handling urgent expenses: Unforeseen financial situations, like medical emergencies or job loss, might require immediate liquidity through mutual fund redemption.
• Booking potential profits: When investments, especially in equity-focused funds, appreciate in value, investors may redeem units to realize potential gains.
• Adjusting asset allocation: Redemption can be a strategy to rebalance a portfolio, ensuring investments align with risk tolerance and financial objectives by shifting between asset classes.
• Responding to fund performance: If a fund persistently underperforms its benchmark or comparable funds, investors might opt to move their money to funds with relatively stronger performance.
• Reacting to markets: Investors may redeem funds in panic because of market downturns. This is usually not recommended, especially if the investment was meant for a long term, as it can lock in losses.

How to redeem mutual funds?

Here are the steps involved to redeem mutual fund units in India:

1. Choose the redemption method

Online redemption: Most fund houses and online platforms offer a redemption facility, making this a convenient option. You can initiate redemption through the fund house’s website, mobile app, or your brokerage account.

Offline redemption: Investors can redeem units by submitting a physical redemption request at a fund house branch or an RTA like CAMS or KFintech.

2. Access your account

Log in to your online account or collect a physical redemption form. Keep your folio number or PAN details handy.

3. Select the fund and units

Choose the mutual fund scheme you wish to redeem. Specify the number of units or the amount to be redeemed. Some schemes may have exit loads, which are charges applied if units are redeemed before a certain period.

4. Verify and confirm

Review the redemption details carefully before proceeding. Online redemptions may require OTP authentication or other security steps. For offline redemptions, ensure that all information is accurately filled before submitting.

5. Processing and settlement

The fund house processes the redemption request. The redemption amount is credited to the registered bank account. The processing time depends on the fund type—liquid funds are usually processed faster, while equity funds may take longer.

If you have invested through a mutual fund distributor, they can initiate the redemption process for you through your preferred mode.

Is mutual fund withdrawal different from selling stocks?

Mutual fund redemption is a transaction with the fund house, while selling stocks involves trading with other investors in the stock market.

Buyer: Mutual funds are redeemed with the fund house, while stocks are sold to other market participants.

Pricing: Mutual funds are priced based on the day-end NAV, whereas stock prices depend on the real-time market value.

What are the types of redemption?

Full redemption: Investors redeem all units held in a specific mutual fund scheme. This results in complete liquidation of the investment in that fund.

Partial redemption: Investors withdraw only a portion of their holdings, either by specifying a number of units or a monetary amount. This approach offers flexibility, allowing access to required funds while keeping the remaining investment intact.

Systematic withdrawal plan (SWP): Though not a one-time redemption, an SWP enables scheduled, periodic withdrawals. Investors can set it up to withdraw either a fixed amount or a fixed number of units at regular intervals, such as monthly or quarterly.

Redemption due to scheme maturity: Close-ended funds have a fixed maturity date. Upon maturity, the fund house automatically redeems all investor units and credits the proceeds.

Steps involved in the mutual fund redemption process

1. Initiating the redemption request

Online: Log in to your mutual fund account via the fund house’s website, mobile app, or brokerage platform. Select the scheme and specify whether the redemption is full or partial. Enter the number of units or the amount to be redeemed, verify the details, and confirm using an OTP or other authentication.

Offline: Obtain a physical redemption form from the fund house branch or RTA (CAMS or KFintech). Fill in details like folio number, scheme name, and redemption amount or units. Submit the completed form to the designated branch.

2. Processing the redemption request

The fund house or RTA processes redemption requests based on the cut-off time. Requests submitted before the cut-off time are processed the same day, while those submitted later are processed the next business day. The NAV applicable depends on the cut-off time rules for that fund.

3. Calculating the redemption amount

The redemption amount is based on the applicable NAV and the number of units redeemed, after deducting any exit load. If an exit load applies, it is subtracted from the redemption proceeds.

4. Settlement and payment

The proceeds are credited to the investor’s registered bank account. Settlement timelines depend on the type of mutual fund.

Exit loads associated with redemption

An exit load is a fee charged by a mutual fund company (AMC) when investors redeem their units before a specified period. It acts as a penalty for early withdrawal and is calculated as a percentage of the redemption amount.

Exit loads differ among mutual fund schemes. Typically, they are higher for shorter investment durations. Equity funds may have exit loads for redemptions within a year, while liquid funds may have them for very short periods. Debt funds also impose varying exit loads.

When should you consider redeeming your fund units?

Achievement of financial goals: If your investment has reached its target value for specific goals like education or home purchase, redemption may be appropriate.

Regular income needs: A Systematic Withdrawal Plan (SWP) involves periodic redemptions to generate income.

Emergency situations: Unexpected expenses like medical emergencies or job loss may require liquidity.

Portfolio rebalancing: If market fluctuations shift your asset allocation, redemption may help restore balance.

Changes in financial circumstances: Retirement or income changes may require shifting from equity to debt funds.

Consistent underperformance: Long-term underperformance of a fund compared to benchmarks and peers may signal the need for redemption. However, it is important to consult a financial advisor in such an event.

Conclusion

Understanding mutual fund redemption is key for investors in India. Whether redeeming units for financial goals, rebalancing, or emergencies, clarity is essential. Consider exit loads, tax implications, and timing before proceeding. Being informed about the process ensures aligned financial decisions. Reviewing scheme details and seeking expert advice can aid long-term planning.

FAQs

What is mutual fund redemption, and how does it work?

Mutual fund redemption refers to selling your units back to the fund house. You can initiate redemption directly with the AMC or through a mutual fund distributor. Once processed, the fund house sells the units and transfers the proceeds to your bank account.

Are there any charges or penalties for redeeming mutual funds?

Some mutual funds impose exit loads if units are redeemed before a predefined period. These charges vary across schemes. Additionally, redemption gains are subject to taxation based on the fund type and holding duration.

How long does it take to receive the redemption amount?

Redemption processing times vary based on the fund category. Liquid funds typically credit proceeds within one business day, whereas equity and other debt funds may take 1-3 business days. Processing follows regulatory guidelines and the fund house’s settlement procedures.

What are the tax implications of mutual fund redemption?

Capital gains are taxable. The tax rate depends upon the fund type and holding period. Gains from units of equity-oriented fund held for more than one year, gains of up to Rs. 1.25 lakh are tax free and thereon are taxed at 12.5%. Gains from holdings under one year are taxed at 20%. Debt fund gains are taxed as per the investor's income tax slab.

When is the right time to redeem mutual funds?

A suitable time to redeem depends on your financial goals, investment horizon, and market conditions. Consider redeeming when you achieve your target, require funds, or if the fund consistently underperforms its benchmark. Avoid redeeming as a reaction to short-term market fluctuations or for impulse buys.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.