Mutual Fund Redemption

Mutual fund redemption is the process where an investor sells their mutual fund units back to the Asset Management Company (AMC). Essentially, it involves withdrawing units to access the returns or principal invested in the mutual fund scheme.
EXPLORE FUNDS
How to Redeem Mutual Funds Online
EXPLORE FUNDS
4 mins read
16-December-2024

Mutual fund redemption refers to the process of converting your mutual fund units into cash by selling them back to the asset management company (AMC). Investors may choose to redeem their investments either partially, by selling a specific number of units, or in full, by withdrawing the entire investment. This process is often undertaken for various reasons, such as addressing financial emergencies, reallocating funds to other investment opportunities, or meeting personal financial goals. The amount received upon redemption is calculated based on the Net Asset Value (NAV) of the mutual fund on the day of redemption. However, investors should be mindful that applicable taxes or exit loads, if any, may impact the final amount received.

What is mutual fund redemption?

Mutual fund redemption refers to the process where an investor sells their mutual fund units back to the asset management company (AMC). In simple terms, it involves withdrawing units from a mutual fund scheme to receive the returns or principal amount invested.

If you submit your redemption application to the fund house or its transfer agency before 3 pm on market trading days, the same day's NAV will be used to calculate the redemption amount. Requests made after 3 pm will receive the next day's NAV for the calculation.

Reasons for mutual fund redemption

Investors redeem their mutual fund holdings for various reasons. Here are some common ones:

  • Reaching financial goals: If you have achieved your financial goal, such as saving for a down payment on a house or retirement, you might redeem your funds to access the money.
  • Financial emergencies: Unexpected events like medical bills or job loss may necessitate selling your mutual funds to meet urgent cash needs.
  • Poor fund performance: If a fund consistently underperforms compared to its benchmark or your expectations, you might redeem your investment and look for better options.
  • Market volatility: During periods of significant market downturns, some investors may choose to redeem their funds to avoid further losses, though this can be a risky strategy for long-term investors.
  • Shifting investment strategy: Your investment goals and risk tolerance might evolve over time. If your current fund mix no longer aligns with your needs, you might redeem and reallocate your investments differently.

How to redeem mutual funds?

Investors have multiple methods for redeeming mutual fund units:

  • Online through a mutual fund platform: If you initially purchased mutual fund units through a mutual fund trading platform, you could place a sell order through the same platform. The proceeds will be credited to your linked bank account.
  • Directly via AMC or distributors: Many investors purchase mutual funds directly from the Asset Management Company (AMC). Most platforms offer offline as well as online options to buy or sell mutual funds. You can easily monitor the progress of the funds online.
  • Registrar or Transfer Agencies (RTAs): RTAs such as CAMS and KFin Tech maintain records for mutual fund houses, and investors can redeem mutual funds through them.
  • Automatic withdrawal plan: Some mutual funds offer automatic withdrawal plans, also known as systematic withdrawals. With this method, you can set up regular redemptions on a predetermined schedule (e.g., monthly, or quarterly). This can be a convenient way to receive periodic payments from your investment.

Is mutual fund withdrawal different than selling stocks?

Mutual fund withdrawal differs from selling stocks. When you withdraw from a mutual fund, you're redeeming units based on the fund’s current Net asset value (NAV). The fund manager sells securities within the fund on your behalf, and proceeds are credited after a few days. Selling stocks, however, involves directly selling shares at the current market price, with the proceeds credited within two trading days. Mutual fund withdrawals are less hands-on compared to stock trading.

What are the types of redemption?

There are three primary types of mutual fund redemption:

  • Unit-based redemption: Investors specify the number of units they want to redeem, and the amount received is determined by the units redeemed and the current NAV.
  • Amount-based redemption: Here, investors specify the desired redemption amount, and the number of units is adjusted to match that amount based on the NAV.
  • Redeem all Units: This allows investors to liquidate their entire investment in the mutual fund.
  • Systematic Withdrawal Plan (SWP): A systematic withdrawal plan is a pre-arranged schedule for regularly redeeming a set amount of money or a specific number of units from the mutual fund. SWPs are typically used by investors who want a steady stream of income from their investments.

Mutual fund redemption process

The method for redeeming mutual funds depends on how the investment was made and the investor’s preferred approach. Here are the common ways to initiate redemption:

  1. Via mutual fund platforms: If the mutual fund units were purchased through an investment platform, redemption can also be completed through the same platform. The redeemed amount is credited to the bank account linked to the platform.
  2. Directly with the AMC: Investors can redeem their mutual fund units directly through the Asset Management Company (AMC) that manages the fund. Most AMCs provide both online and offline options for redemption, making the process straightforward.
  3. Through Registrars and Transfer Agents (RTAs): Registrars and Transfer Agents (RTAs), such as CAMS and KFin Technologies, maintain investor records for mutual funds. Investors can approach these RTAs to redeem their mutual fund units.
  4. Automatic withdrawals: In the case of a Systematic Withdrawal Plan (SWP), withdrawals are processed automatically at regular intervals based on the predefined schedule, providing convenience and flexibility to investors.

Exit loads associated with redemption

Most mutual funds encourage long-term investments and exiting before a specified period may incur an exit load on the withdrawn amount. The minimum investment holding period can vary between equity and debt funds, and certain types of debt funds have shorter holding periods. Exit loads are fees charged by mutual funds when investors redeem or withdraw their investment before a specified holding period. These fees are designed to discourage short-term or frequent trading in the fund and compensate the fund for potential costs associated with such redemptions. Exit loads can vary between mutual funds and are typically expressed as a percentage of the amount being redeemed.

When should you redeem?

Several factors may prompt an investor to consider redeeming their mutual fund units:

  • Below-par performance: Consistent underperformance, where the fund fails to match benchmark returns, may signal a need to reassess your investment and explore better-performing options.
  • Financial emergency: In urgent capital-intensive situations, like medical emergencies or job loss, investors may need to liquidate investments. Some liquid funds offer instant redemption.
  • Changes in fund strategy: If the mutual fund alters its investment strategy, fund manager, or sector focus in a way that no longer aligns with your financial goals, it may be wise to consider redemption.
  • Financial goal completion: Achieving your financial objectives is the aim of investing. If your investment has met your target returns over a long period, you may consider redeeming it.

How can you avoid tax on mutual fund redemption?

While it is challenging to completely avoid taxes on mutual fund redemptions, there are several ways you can employ to minimise your tax liability. The specific approach you take will depend on your financial situation and goals. Here are some ways to reduce the tax impact of mutual fund redemptions:

  • Hold Investments for the Long Term: Keeping mutual fund investments for more than one year qualifies for long-term capital gains tax, which has a lower tax rate compared to short-term gains.
  • Utilize Tax-Saving Funds (ELSS): Invest in Equity Linked Savings Schemes (ELSS) as they offer tax benefits under Section 80C of the Income Tax Act and gains up to a certain limit are tax-free.
  • Offset Gains with Losses: In the case of a short-term capital loss in mutual funds, it can be offset against either short-term or long-term capital gains from any other asset. Conversely, a long-term capital loss in a non-equity fund can only be set off against a long-term capital gain in another asset.

While temporary market fluctuations may lead to underperformance, it is essential to remain patient and trust the expertise of mutual fund managers in rebalancing portfolios. Only consistent underperformance should warrant consideration for redemption, as the primary goal of mutual fund investments is to help you achieve your financial objectives in the long run.

Charges to redeem mutual fund units

The charges to redeem mutual fund units can vary depending on the specific mutual fund company, the type of mutual fund, and the terms outlined in the fund's prospectus. However, here are some common charges you might encounter:

  1. Redemption fee: Some mutual funds impose a redemption fee when you sell your units. This fee is usually a percentage of the amount being redeemed and is designed to discourage frequent trading.
  2. Exit load: Similar to a redemption fee, an exit load is a charge imposed when you sell your mutual fund units within a certain time frame after purchasing them. This fee may vary depending on how long you have held the units.
  3. Deferred Sales Charge (DSC): With DSC, you might not incur an upfront fee when you purchase the mutual fund units, but if you sell them within a specified period (often several years), you'll face a fee. The fee typically decreases the longer you hold the units.
  4. Transaction fee: Some brokerages or mutual fund companies charge a flat fee for processing redemption transactions.
  5. Tax implications: Depending on the type of account holding your mutual fund units (e.g., taxable account, retirement account), there could be tax implications upon redemption. For instance, capital gains tax might apply if your investment has appreciated in value.

It is crucial to thoroughly read the fund's prospectus and any accompanying documents to understand all the charges associated with redeeming mutual fund units. Additionally, consulting with a financial advisor can provide personalised guidance on navigating these fees and making informed investment decisions.

When should you consider redeeming your fund units?

1. Consistent underperformance of the fund

Redeeming mutual funds due to short-term market volatility is usually unnecessary, especially for long-term investors, as markets tend to stabilise over time. However, consistent underperformance could be a valid reason to consider redemption.

A fund is considered to underperform if it consistently generates a negative alpha (α), which is the difference between the fund’s return and its benchmark’s performance, such as the SENSEX or NIFTY50. For example, if the SENSEX grows from 36,000 to 39,000, delivering a return of 8.3%, but your fund generates only 6% during the same period, it has an alpha of -2.3%.

In such cases, it is essential to review your fund’s performance and determine if reallocating your investments to a better-performing fund is a more effective way to achieve your financial goals.

2. Financial emergencies

Unexpected financial needs, such as medical expenses or job loss, may require you to redeem your investments. If you have invested in liquid funds specifically for emergencies, many of these funds offer instant redemption facilities, allowing you to access your money quickly when required.

3. Changes in fund strategy

Mutual fund houses may alter their investment strategies, such as shifting focus between large-cap, mid-cap, or small-cap stocks or targeting new sectors. They may also change fund managers to adapt to market dynamics. While AMCs usually notify investors about such changes, you should consider redeeming your units if the revised strategy no longer aligns with your financial goals or risk tolerance.

4. Achievement of financial goals

The primary purpose of investing is to fulfil your financial objectives. If you have reached your investment goals and achieved the desired returns, you may want to redeem your units. This allows you to utilise the funds for their intended purpose or reinvest them in new opportunities based on your evolving financial plans.

5. Rebalancing your portfolio

As markets fluctuate, the allocation of your investments across asset classes may deviate from your original plan. Periodically rebalancing your portfolio is necessary to maintain your preferred risk-return profile. Redemption can be part of this process, enabling you to shift funds between equity, debt, or other investment options as required.

By carefully evaluating these scenarios, you can make informed decisions about when to redeem your mutual fund units.

Things to remember while redeeming mutual funds

To maximise your mutual fund returns and minimise unnecessary costs, you can consider the following points while redeeming your mutual funds:

The day and time for redemption

When you decide to sell your mutual fund units, be aware that the processing time varies for different types of funds. Usually, this processing time can take from 1 to 7 business days (excluding weekends). Also, the value of your mutual fund units is based on the NAV (Net Asset Value), which is updated daily.

Now, if you submit your request before 3 P.M., the NAV of that same day will be used. However, if you submit after 3 P.M., the next day’s NAV will be applied. This timing can significantly impact the final amount you receive, especially if the NAV changes substantially from one day to the next.

Capital gains tax

When you sell your mutual fund units, the tax you pay on your profits (capital gains) depends on how long you've held the investment. This is different for both equity funds and debt funds. As an investor, it is important for you to understand this difference because it affects your net returns when you redeem your mutual funds. Moreover, by considering how long you've held your investment and the corresponding tax implications, you can better plan your redemption to maximise your post-tax returns.

Let’s check out the latest capital gains tax rules applicable to both equity and debt funds:

For equity funds:

  • Short-term Capital Gains (STCG): If you sell equity fund units within a year (12 months or less), your profits are considered short-term capital gains. These gains are now taxed at 20%, which has increased from the previous rate of 15% as per the changes proposed in the Union Budget 2024.
  • Long-term Capital Gains (LTCG): If you hold the equity fund units for more than a year (over 12 months), the profits are considered long-term capital gains. These gains are exempt from tax up to Rs. 1.25 lakh (an increase from the previous Rs. 1 lakh limit). Any amount above this exemption is taxed at 12.5%, up from the earlier rate of 10%.

For debt funds:

  • Short-term Capital Gains (STCG): If you sell debt fund units within two years (24 months), your profits are treated as short-term capital gains. As per the new Budget 2024, the holding period has been reduced from the previous limit of three years (36 months). These gains are taxed according to your income tax slab rates, which vary based on your total taxable income.
  • Long-term Capital Gains (LTCG): If you hold the debt fund units for more than two years (24 months), the profits are considered long-term capital gains. These gains are taxed as per the applicable income slab rates.

Exit load and other charges

Selling mutual fund units before a certain period usually incurs an exit load, which is a fee of about 1% to 2% of the investment. Additionally, a securities transaction tax (STT) of 0.001% is charged by the Ministry of Finance on buying or selling units of equity or equity-oriented funds. It is worth mentioning that STT is not payable on debt funds.

Mutual fund redemption vs Selling stocks

While mutual fund redemption and selling stocks both involve liquidating investments, they differ significantly in their process, pricing, and execution. Although a demat account is commonly used for both, the mechanics of redemption and stock selling vary. The table below highlights the key differences between the two:

Aspect

Mutual fund redemption

Selling stocks

Process

Units are redeemed directly through the mutual fund house.

Shares are sold to a buyer in the secondary market.

Pricing

Based on the closing Net Asset Value (NAV) of the day when the redemption request is submitted.

Determined by the market price at the time of sale.

Obligation to buy

The fund house is obligated to repurchase the units.

No obligation; the sale depends on finding a willing buyer.

Convenience

Simpler, as it doesn’t require finding a buyer.

More complex, as it involves locating a buyer in the market.

 

Conclusion

Understanding mutual fund redemption processes and their tax implications is vital for investors navigating the financial landscape. With a comprehensive guide at hand, investors can confidently navigate the intricacies of redeeming mutual fund units, taking into account factors such as redemption fees, exit loads, and potential tax liabilities. By carefully considering these aspects and consulting with financial professionals when needed, investors can make informed decisions aligned with their financial goals and risk tolerance. Ultimately, an informed approach to mutual fund redemption empowers investors to optimise their investment strategies while mitigating unnecessary costs and maximising returns over the long term.

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Frequently asked questions

What is the best time to redeem mutual funds?

The best time to redeem mutual funds depends on your investment goals and market conditions. It is often recommended to redeem when your financial objectives align with the fund's performance and to consider potential tax implications.

Can I redeem mutual fund after 1 year?

Yes, you can redeem mutual funds after holding them for one year. However, it is essential to check the fund's specific terms and conditions, as some funds may have different redemption requirements.

What is the new rule for mutual fund redemption?

New rules for mutual fund redemption can vary based on regulatory changes and fund policies. It is crucial to stay updated on any changes in redemption rules, such as minimum holding periods or updated fee structures.

Can I redeem mutual fund anytime?

Yes, you can redeem mutual fund units anytime for investments in open-ended schemes. These funds allow redemption during market hours without any restrictions. However, for Equity Linked Savings Schemes (ELSS), there is a mandatory 3-year lock-in period, meaning you cannot redeem the units before this duration. Always check the terms and conditions of your specific fund before redeeming.

What is the cut-off time for redemption?

The cut-off time for redemption refers to the deadline by which redemption requests must be submitted to be processed on the same day. Cut-off times can vary among mutual fund companies and can be affected by factors like time zones.

Is MF redemption taxable?

Yes, mutual fund redemption may be subject to taxes. Capital gains tax typically applies to any profits made from the sale of mutual fund units, but tax rates and exemptions can vary based on factors like holding period and the type of account.

Can I redeem mutual funds directly?

Yes, many mutual fund companies offer direct redemption options, allowing investors to redeem their units directly through the fund company's website, mobile app, or customer service channels.

How is redemption calculated?

Mutual fund redemption is typically calculated based on the current net asset value (NAV) of the fund's units. The redemption amount is determined by multiplying the number of units being redeemed by the current NAV, minus any applicable fees or charges.

Is redemption date same as maturity date?

No, the redemption date is the date when you sell or redeem your mutual fund units, while the maturity date refers to the end date of a fixed-term investment, such as a bond or certificate of deposit. Mutual funds typically do not have a maturity date, as they are open-ended investment vehicles.

Are there any charges for redeeming mutual funds?

Yes, there are charges associated with redeeming mutual funds. Primarily, it includes an exit load, which is a fee charged by the fund house if you redeem units before a specified period. This fee is usually in the range of 1% to 2% of the redemption amount. Additionally, there is a Securities Transaction Tax (STT) for equity-oriented funds, which is 0.001% of the sales consideration. It must be noted that STT is not levied on debt funds.

When is the right time to redeem mutual funds?

The right time to redeem mutual funds depends on several factors, such as your financial goals, market conditions, and tax implications. Ideally, redeeming should align with your investment horizon and goals. If the market is performing well and you have achieved your investment objectives, it might be a good time to redeem.

Additionally, while redeeming, consider the tax implications. Mostly, long-term holdings offer better tax benefits than short-term ones. That’s because, as per the latest changes proposed in the Union Budget 2024, your LTCG is exempt up to Rs. 1,25,000. Any amount beyond this threshold is taxed at 12.5%. In comparison, STCG arising from equity-oriented funds is taxed at 20%, whereas debt funds are taxed as per your applicable tax rates.

Why do investors redeem mutual funds?

As an investor, you can redeem mutual funds for various reasons, such as reaching financial goals, reallocating your portfolio, or needing cash for emergencies. Additionally, some may redeem to take advantage of favourable market conditions or to invest in other opportunities offering better returns. Hence, while redeeming, always ensure that the redemption aligns with your financial goals. Also, consider the market timing and tax implications.

How do I redeem mutual funds offline?

To redeem mutual funds offline, you can visit the AMC's (Asset Management Company) or RTA's (Registrar and Transfer Agent) designated office. Fill out a redemption request form with essential details such as the holder's name, folio number, and the number of units or the amount to be redeemed.

Alternatively, you can also redeem through an agent or distributor by submitting the signed form to them, which they will forward to the AMC or RTA. Once processed, the redemption proceeds are credited to your registered bank account. If an IFSC isn't provided, you may receive an account payee cheque instead.

What information is required for offline redemption?

For offline mutual fund redemption, you will need to provide the holder's name, folio number, scheme name, number of units or amount to be redeemed, and your signature on the redemption request form. Additionally, ensure your bank account details are up-to-date, as the proceeds will be credited there. If an IFSC isn't available, be aware that you will receive an account payee cheque instead.

How do I redeem mutual funds online?

To redeem mutual funds online, visit the AMC, RTA, or MF Central websites. Log in using your folio number, PAN card number, or specific login credentials. Next, go to the redemption section and select the scheme from which you wish to redeem. Now, specify the number of units or the amount you want to redeem. Lastly, confirm your request and the proceeds will be credited to your registered bank account.

Can I redeem mutual funds through a Demat account?

Yes, you can redeem mutual funds through a Demat account. Be aware that if you purchased the mutual funds via your Demat or trading account, you will be required to use the same account for redemption. Now, log into your trading platform and navigate to the mutual fund section. Select the scheme and specify the units or amount to redeem. Once processed, the redemption amount will be electronically credited to the bank account linked with your Demat account.

What are the tax implications of redeeming mutual funds?

The tax implications for redeeming mutual funds vary between equity and debt funds. For equity funds, short-term capital gains (STCG) apply if held for 12 months or less and are taxed at 20% (up from 15%). Long-term capital gains (LTCG) arise when you sell units after holding them for more than 12 months. These long-term gains up to Rs. 1.25 lakh are tax-exempt (up from the previous limit of Rs. 1 lakh), and gains above this amount are taxed at 12.5% (up from 10%).

For debt funds, STCG applies if held for 24 months or less and is taxed according to the investor's income tax slab. LTCG applies if held for more than 24 months and is also taxed as per the investor’s income tax slab.

What is the 7-day redemption requirement?

The 7-day redemption requirement mandates mutual fund houses to process and pay the redemption proceeds to investors within seven working days from the date of receiving the redemption request. This ensures timely access to funds, enhancing investor convenience. If there’s a delay, the fund house may be required to compensate the investor with a penalty interest.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form:

(ii) carry customized/personalized suitability assessment:

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

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Disclosure: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.