Mutual funds offer a convenient way to invest in a diversified portfolio of securities. However, there may come a time when you need to access your funds. Understanding the process of withdrawing money from mutual funds is essential for maximising your investment returns.
This guide will delve into the various methods available for withdrawing funds from mutual fund investments. Whether you're looking to redeem a portion or all of your holdings, we'll provide clear instructions and insights to help you navigate the process seamlessly. To explore how to withdraw money from mutual funds in detail, continue reading the following sections.
What does redemption from mutual funds mean?
Withdrawal, known as redemption in mutual funds, involves liquidating investments by selling units owned in a mutual fund scheme at the prevailing Net Asset Value (NAV). When you withdraw funds from a mutual fund, you essentially redeem a certain number of units you own and receive their value.
For instance, if you hold 10,000 units of a mutual fund scheme and each unit is priced at Rs. 10, you can opt to redeem a specific number of units or withdraw a certain amount in currency terms. For instance, if you wish to withdraw Rs. 50,000, you would need to redeem 5,000 units from your mutual fund holdings. Similarly, you have the flexibility to redeem 100 units, 9,000 units, or any other number to withdraw the corresponding amount from your mutual fund portfolio.
Types of mutual fund redemptions
Mutual fund redemptions offer investors flexibility in managing their investments, allowing them to access their funds when needed. There are two main types of mutual fund redemptions: partial withdrawal and full withdrawal.
1. Partial withdrawal
- Partial withdrawal refers to the process of redeeming only a portion of the total investment in a mutual fund while keeping the remaining amount invested.
- Investors may opt for partial withdrawals when they need funds for specific purposes or expenses without liquidating their entire investment.
- The amount withdrawn is typically transferred to the investor's bank account or provided in the form of a cheque, depending on the redemption method chosen by the investor.
- After a partial withdrawal, the investor's remaining investment in the mutual fund continues to earn returns and remains subject to market fluctuations.
2. Full withdrawal
- Full withdrawal, also known as complete redemption, involves liquidating the entire investment in a mutual fund scheme.
- Investors choose full withdrawal when they need to access all their funds for various reasons such as major expenses, financial goals, or portfolio restructuring.
- Upon full redemption, all units held by the investor in the mutual fund scheme are sold, and the proceeds are credited to the investor's designated bank account or provided through a cheque.
- Once the full withdrawal is executed, the investor no longer holds any investment in the mutual fund scheme, and the relationship between the investor and the fund is terminated.
It's important for investors to consider the implications of both partial and full redemptions on their investment objectives, financial goals, and tax implications. Additionally, investors should review the terms and conditions associated with redemptions, including any applicable exit loads, redemption fees, and processing times, which may vary depending on the mutual fund scheme and the fund house.
How to withdraw money from mutual funds?
- Through an asset management company or transfer agent: You can visit the website or the branch office of the asset management company (AMC) or the registrar and transfer agent (RTA) of your mutual fund and submit an online request or offline redemption request. You will need your folio number, PAN, and bank details to complete the process. You will receive the redemption amount in your bank account within a few days, depending on the type of fund.
- Through an agent or broker or platform: If you have invested in your mutual fund through an agent or broker or an online platform like Bajaj Finserv Platform, you can put in the redemption request. The agent or broker or platform will process your request and you will receive the redemption amount in your account.
- On your own (online): If you have invested in your mutual fund directly without any intermediary, you can redeem it on your own. You will need to visit the website of your mutual fund and log in with your credentials. You will need to select the fund and the number of units you want to redeem and confirm your request. You will receive the redemption amount in your bank account within a few days, depending on the type of fund.
What happens after withdrawal?
Upon submission of a redemption or withdrawal request, you will receive regular updates on the status of your transaction. Following successful verification, the net proceeds, after applicable deductions, will be credited to your designated bank account within three business days. Please note that for closed-end schemes, units will mature automatically, eliminating any exit load charges.
Steps involved in mutual fund withdrawal
Withdrawal process for mutual funds is as follows:
1. Request submission
- Submit a redemption request online, through the mobile app, or at a branch office.
- Provide details such as the amount or number of units to be withdrawn.
2. Verification
- Fund houses verify your holdings and the applicable terms and conditions of the mutual fund scheme.
- This includes checking for lock-in periods or exit loads.
3. Processing
- The withdrawal process typically takes a few business days.
- Processing time may vary depending on the fund house and the type of mutual fund.
4. Tax implications
- Consider the tax implications of your withdrawal.
- Capital gains tax applies to mutual fund returns.
- Tax rates differ based on the duration of investment (short-term vs. long-term) and fund type (equity vs. debt).
5. Payment
- Funds are usually credited directly to your registered bank account.
- The time for funds to reflect in your account may vary based on fund house and bank processes.
Reasons for mutual fund redemption
- To meet your financial goals: You may have invested in your mutual fund with a specific financial goal in mind, such as buying a house, funding your child’s education, or planning your retirement. When you achieve your goal or are close to achieving it, you may want to redeem your mutual fund and use the money for your purpose.
- To rebalance your portfolio: You may have invested in your mutual fund with a certain asset allocation, such as 60% equity and 40% debt. Over time, due to market fluctuations, your asset allocation may change, such as 70% equity and 30% debt. This may increase your risk exposure and deviate from your investment objective. To restore your original asset allocation, you may want to redeem and invest in other funds.
- To switch to better performing funds: You may have invested in your mutual fund with an expectation of a certain return. However, over time, you may find that your mutual fund is underperforming compared to its benchmark or peers. You may also find that there are other funds that offer better returns, lower costs, or higher ratings. To improve your returns and optimize your portfolio, you may want to redeem and switch to a better performing fund.
- To deal with an emergency: You may have invested in your mutual fund with a long-term horizon. However, life is unpredictable, and you may face an emergency situation, such as a medical emergency, a job loss, or a family crisis. To deal with such situations, you may need to access your money quickly and easily by redeeming your mutual fund.
Can one withdraw mutual funds anytime?
- Redeemable at any time, open-end schemes offer flexibility for investors. Yet, ELSS investments differ, imposing a mandatory three-year lock-in period.
- With open-end schemes, whether in equity or debt, mutual funds maintain liquidity, allowing investors to easily withdraw their investments without any specific constraints.
Is it advisable to exit from mutual funds at any time?
Exiting mutual funds without a prolonged investment horizon is not recommended. Typically, the rule of thumb is to remain invested for four to five years for better equity fund returns and two to three years for debt funds. For long-term mutual fund investments, it is advisable to refrain from unnecessary withdrawals to allow your funds to grow steadily. Market fluctuations are inherent, and maintaining a steadfast approach without succumbing to panic selling is crucial. Utilising a mutual fund calculator can help track performance and reinforce your commitment to long-term financial goals.
Tax implications of mutual fund withdrawals
When selling mutual fund shares, investors may encounter capital gains or losses, the tax treatment of which is contingent upon the duration of their investment. If the holding period of the fund units is less than one year, any gains or losses incurred are categorised as short-term capital gain/loss. Conversely, if the holding period exceeds one year, the gains or losses are classified as long-term capital gain/loss.
In India, short-term capital gains are taxed at a rate of 15%, while long-term capital gains are taxed at 20%, with an exemption of Rs. 1 lakh on equity-oriented mutual funds.
Factors to consider while submitting a mutual fund redemption request
- The type of fund: Different types of mutual funds have different liquidity, risk, and return profiles. You should choose the type of fund that suits your investment objective, risk appetite, and time horizon.
- The lock-in duration: Some mutual funds have a lock-in period, which means you cannot withdraw your money before a certain period. For example, tax-saving funds or ELSS (Equity Linked Savings Scheme) have a lock-in period of three years, which means you cannot redeem them before completing three years from the date of investment. You should check the lock-in duration of your mutual fund before investing and redeeming.
- The exit load: Exit load is a fee that is charged by the fund house when you withdraw money from your mutual fund before a specified period. For example, some funds may charge an exit load of 1% to 2% if you redeem your investment within a certain time period. The exit load reduces your net redemption value and affects your returns. You should check the exit load of your mutual fund before investing and redeeming.
- The holding period of the mutual funds: The holding period of your mutual funds determines the tax implications of your redemption. If you redeem your equity funds within one year of investment, you must pay short-term capital gains tax at 15%. If you redeem after one year, you must pay long-term capital gains tax at 10% on the gains exceeding Rs. 1 lakh in a financial year.
Similarly, if you redeem your debt funds within three years of investment, you must pay short-term capital gains tax as per your income tax slab. If you redeem after three years, you must pay long-term capital gains tax at 20% with indexation benefit. You should consider the tax implications of your redemption and plan accordingly. Tax laws are subject to amendments made to it from time to time. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax and/or investment advice. Please consult your tax advisor, before making in any investment decision based on the above.
