What is mutual fund redemption?
Mutual fund redemption is the act of withdrawing your funds from a mutual fund that you had earlier invested in. The process is usually quite fast.
Mutual funds redemption refers to the process of selling the units held by investors. When investors redeem their units, they essentially liquidate the units based on the current market NAV. It allows investors to exit the investment and get back their funds.
In India, investors can initiate the mutual fund redemption process through various channels, including online platforms, registered intermediaries, or directly with Asset Management Companies (AMCs).
The redemption process can entail certain costs, such as exit loads. Hence, investors must carefully evaluate their financial goals, investment horizon, and any associated charges before proceeding with mutual fund redemption.
When is the right time to redeem your mutual fund?
It is hard to decide your mutual fund redemption time, especially if you have hopes of your portfolio increasing in value in the near future or you are unsure of what are the financial implications of such a mutual fund redemption.
The following are the usual circumstances when an investor should redeem mutual funds that they had invested in:
1. When the investor is quite close to or has reached his/her goals to meet which he/she had started investing in the first place.
For example, if you had planned to invest in a mutual fund until your corpus of funds reach ₹ 1 cr so that you could start your own business with that amount, then you should follow through with your plan. It is important to not get too used to passive income if you already have plans to actively use funds for higher returns.
2. If the mutual fund has failed to perform consistently, including in comparison to other funds and avenues for passive income.
For example, if mutual fund A has given only 5% returns over the last 3 years while mutual funds B, C and D have been giving returns of 7%, 12% and 15% over the same time period then it does not make sense to keep faith in mutual fund A. This is especially true if the fund is underperforming within its own class of funds e.g. being the worst performer among debt funds or small cap funds. On the flip side, if the fund is not performing that well, but is performing better than the economy or the sector or some other benchmark, then perhaps you should stick by that fund.
3. When the investor feels the need to simply rebalance the portfolio due to changes in market trends
Sometimes you need to adjust your portfolio by changing the number of units invested for each security – in such cases you may want to rebalance the existing portfolio under the same agency. If that is not possible, then you can redeem your portfolio and shift it to a different fund partly or completely.
What all to consider while deciding the mutual fund redemption time
Net Asset Value (NAV) –
The value of the redeemed mutual fund is based on its NAV on the date of redemption. It is defined as the difference between the total asset value and the total liabilities of the fund. The NAV for each day of trading is declared at the close of the trading day. Therefore, choose the date of redemption to be on a day when the Net Asset Value (NAV) is rather high as it will give you a higher value.
Lock-in Period and Exit load –
Mutual funds may place a ‘lock-in period’ when the money invested is supposed to stay in the fund and not be withdrawn. If, however, a need does arise and the investor is forced to withdraw money from the fund, then an exit penalty also known as an ‘exit load’ must be paid by the investor. Therefore, before redeeming, every investor should check if their lock-in period is still not over and there are any exit loads to be paid for the redemption – if yes, what are its financial implications on the overall investment and financial position?
Tax implications –
At the time of redemption, there are various types of taxes imposed on long term and short term capital gains, equity and debt funds (as well as hybrid funds). Therefore, it is important to know what will be the tax requirements for redeeming funds at that point in time.
How to Redeem Mutual Funds Online?
Redemption if Funds Bought Through AMC
You can redeem using the online portal of AMC
- Visit the AMC website
- Login to your account using your username and password
- Visit the dashboard and then to the desired mutual fund page
- Select the number of units you want to redeem
- Confirm your transaction
- You can redeem partially or fully
You can also use the mobile application of AMC to redeem your units.
Funds Bought Through a trading or Demat account
If you have purchased mutual funds through your personal Demat account follow the steps below to redeem the units.
- Login to the Demat account (on the broker’s or bank’s website or mobile application)
- Navigate to mutual funds
- Click on the scheme name you want to redeem
- Make an application for redemption
- Select the number of units you want to redeem
- The money will get credited to your bank account linked to the Demat account
Charges to Be Paid by an Investor to Redeem Mutual Fund Units
When you redeem the mutual fund units, they are associated with certain loads or charges in a few situations.
Exit load: If you exit your mutual funds before a certain holding period, you’ll be charged an exit load. In most cases, if the holding period is less than 1 year, you may have an exit load of 1%.
Exit loads can reduce your final returns. Check the exit load policies of the mutual fund scheme before investing.
An exit load is usually charged on equity funds. Short and ultra-short-term funds don’t have an exit load. The exit load percentage will be deducted from the NAV of each unit before the final redemption value is calculated.
If you are interested in mutual funds investment or equity investments, try learning more about how the stock market works. If you do not have a Demat account, open one today in a matter of minutes.
What is the best time to redeem mutual funds?
The best time to redeem mutual funds is when you reach the investment goal that you intend to achieve through mutual fund investment.
How long should you stay invested?
The average holding period for mutual funds is considered to be 3-5 years. However, the final decision should depend on your overall financial goal and investment purposes.
Can I redeem the mutual fund units anytime?
You can sell the units of your mutual fund investments at any time. However, there can be consequences in terms of charges and loads.
How does tax consideration factor into redemption decisions?
Redeeming mutual funds might attract capital gains tax liability. If the holding period is more than one year, it qualifies for long-term capital gain tax rates. It is usually lower than short-term capital gain tax rates.
What role does market performance play in deciding when to redeem?
Market fluctuations can affect your final returns. Redeeming your mutual funds during market downturns could result in losses. Consider staying invested or timing redemptions during market upswings.