What is Mutual Fund Redemption & How to Redeem Mutual Funds
27 May, 2024
Synopsis
Mutual fund redemption lets you withdraw your investment at the current NAV, partially or fully.
Types of redemption include unit-based, amount-based, and full redemption.
Redeem online through AMC websites, trading accounts, or with agents and banks.
Key reasons to redeem include consistent underperformance, emergency needs, a change in fund strategy, or achieving financial objectives.
Be aware of applicable taxes, exit loads, and redemption timelines (1-4 working days).
Just walk down memory lane to your piggy bank days. When and how you would get the money was the question that you kept asking your mom. The charm of taking out the piggy bank cash was to use it to buy your favourite ice cream, comics or a pack of chocolates! Now imagine, mutual funds as the piggy bank, where the charm of redemption remains the same – though the objective of redemption may have changed. The best time to redeem your mutual fund units is when you meet your investment objectives and achieve your dreams – buying a bike, car, jewellery or going for a vacation. Mutual fund redemption allows investors to withdraw their investment partially or completely from a mutual fund scheme at the prevailing Net Asset Value (NAV). Let us understand how mutual fund redemption is done online or offline in India.
What is Mutual Fund Redemption?
Mutual fund redemption is nothing but the encashment or withdrawal of your investment from a mutual fund scheme. It involves selling your units back to the mutual fund house at the applicable NAV and receiving money in return. You can redeem part of your investment, i.e. a specified number of units or your entire investment corpus, from a mutual fund scheme. If your redemption application is submitted with the fund house or its transfer agency before 3 pm on market trading days, then the same day's NAV is applicable for calculating the redemption amount. Requests after 3 pm get the next day's NAV.
When is the Redemption Amount Credited in your Account?
Rules vary according to nature of the funds:
Liquid funds: 1-2 working days
Debt funds: 2-3 days
Equity funds: 3-4 days generally
Is mutual fund withdrawal different than selling stocks?
Selling stocks requires finding a buyer in the secondary market at a desired price. Mutual funds can be redeemed directly with the fund house at the closing NAV without requiring a buyer. That is, it is mandatory for the mutual fund house to buy back the units from investors based on the fund's value at the end of the day once the fund house receives the redemption application.
Types of Mutual Fund Redemption
Unit-Based Redemption: The investor specifies the number of units to redeem. The amount realised depends on the prevailing NAV.
Amount-Based Redemption: The investor specifies the redemption amount. The number of units redeemed is calculated by dividing the amount by NAV.
Full Redemption: The investor redeemed the entire mutual fund investment corpus.
Applicable Taxes and Exit Loads: Profit made on redemption attracts capital gains tax. For equity funds held under 1 year, a 15% short-term capital gains tax applies. For debt funds held under 3 years, tax slab rates apply. Long term capital gains over 1 or 3 years attract 10% and 20% tax, respectively. An exit load of up to 1% may apply if it is redeemed before the minimum holding period.
How to Redeem Mutual Funds?
Here is the mutual fund redemption process:
Online using AMC website or platform: Enter Folio number, select redemption option and raise request.
Through Trading or Demat Account: Place redemption order with a linked broker just like selling shares.
Via Registrar and Transfer Agents like CAMS: Fill out the physical form and submit it to the nearest RTA branch.
Through Distributors or Banks: Submit transaction slips to an agent or visit a bank branch for redemption.
When Should You Redeem?
Consistent Underperformance: Redeem if the fund lags the benchmark over 1-2 years, negatively impacting your investment objectives.
Emergency Needs: Liquidate investment for medical difficulties, job loss, financial requirement etc., after assessing other options.
Change in Fund Strategy: Redeem if the fund manager style or investment approach no longer matches your risk appetite.
Objective Achievement: Withdraw corpus if investment tenure is over, and the financial objective has been met.
A temporary underperformance alone should not trigger redemption if your investment horizon is long enough to ride out volatility. Redeem only if the fund consistently fails to deliver satisfactory returns over an extended period compared to the category average or benchmark. Don't redeem equity funds based on short-term price movements. Reassess your mutual funds regularly after a few months and avoid hasty exits due to market corrections - as market movements are bound to reverse.
Mutual fund redemption allows the systematic withdrawal of your investments. Know the applicable NAV, tax and exit load rules before redeeming. Redeeming for emergencies or changed strategies is understandable but stay invested for long term objectives despite interim volatility. Online modes and market intermediaries make redeeming mutual fund units convenient for investors in India.
Download the HDFC Bank SmartWealth App from Playstore/Appstore to make your investment and redemption journey smooth and easy.
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