You’ve invested in mutual funds but now you need to withdraw them. Happens. In fact, you would want to liquidate your investment during emergencies, STPs, or just because you’ve achieved your goal for the fund.
What might you do then, to get your money with returns back to your bank account?
Redeem them! Mutual fund redemption means selling your units to convert them into cash. In this article, let us dig into the process and find out everything about mutual fund redemption.
What are Mutual Fund Redemptions?
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 receive returns or principal from the mutual fund scheme based on the Net Asset Value (NAV) prevailing on the redemption day.
Mutual fund redemption is done partially or wholly as per the requirement of the investor. If you need to reinvest a part of your assets, you can target a part of your units or a part of the total amount.
There is nothing to stop you from withdrawing the whole amount either, although there are varying charges involved with each redemption. More on that later.
Types of Mutual Fund Redemption
When redeeming a mutual fund investment, you need to decide how much capital needs to be liquidated.
The capital can be in the form of the number of units you own or the exact amount of your money the fund is currently carrying.
Based on these criteria, mutual fund redemptions are categorized into the following:
Unit-based Redemption
In this particular redemption method, you have the option to specify the number of mutual fund units you wish to redeem.
The amount you will get in your bank will be based on the units and their net asset value (NAV).
This can be calculated as
Final amount = Number of units redeemed X NAV of one unit
Amount-based Redemption
In this type of redemption, the amount you require for your financial emergency or reinvestment is the main criterion.
You have the flexibility to designate the desired amount for redemption.
Consequently, the corresponding number of units is automatically deducted based on the prevailing NAV, aligning with the specified redemption amount.
Redeem All
In this type of redemption, all units of mutual funds are sold and the total amount is credited to your account.
When Should You Redeem Your Mutual Fund Units?
Factors to keep in mind during mutual fund redemption time include:
- Unforeseen emergencies: Unexpected financial crises in the family or otherwise can happen at any time. In such scenarios, there could be a need to swiftly transfer funds from investments to address urgent capital-intensive expenses.
- Consistent scheme underperformance: Redeeming funds due to short-term market fluctuations is unnecessary for long-term investors, as markets tend to stabilize eventually. However, consistent underperformance, indicated by a negative alpha (α), may warrant reconsideration.
For instance, if your mutual fund consistently lags behind the benchmark like Sensex (which implies a negative α value), it might be wise to reassess your investment strategy and consider reallocating to a better-performing fund aligned with your objectives
- Financial goal fulfillment: The primary aim of any investment is to fulfill your financial objectives. If you’ve invested for an extended period and attained your desired returns, it is time to redeem your investment.
- Misalignment in investor-AMC strategy: Mutual fund houses typically maintain a consistent strategy in selecting stocks and targeting sectors. However, changes in strategy or fund managers may occur to improve market efficiency. You will be informed of such changes.
Mutual Fund Exit Methods
You can select any of the below methods.
- Registrar or transfer agencies: Registered transfer agencies like CAMS, kFin, and Karvy do the transfer and redemption of mutual funds redemptions. They keep a record of transfers and records of mutual fund houses.
- Through a demat account: If you have purchased your mutual fund units through a trading or Demat account through a broker, you must place a sell order through their platform.
- Directly through AMC or distributors: Most of the time you will buy from a distributor or AMC. They provide you the ease of transaction directly from the comfort of your office or house using the online portals.
Important Considerations For Mutual Fund Redemption
Here are some aspects that you must keep in mind when going in for a mutual fund redemption:
Exit Load Calculation
In a few cases, you may have to consider a charge known as exit load. In some cases, it may be a certain period before which you agreed not to redeem before the term ends.
This depends on mutual fund redemption time, i,e. within a year of purchase. The exit load charged is usually close to 1% of the withdrawn amount.
Taxes
For equity-based mutual fund investments, if the holding period is less than a year, a short-term capital gains tax at a rate of 15% applies.
Conversely, if the holding period exceeds one year, a long-term capital gains tax of 10% applies, with taxes only applicable if gains exceed 1 lakh Rupees.
For debt funds, this period is 3 years. The tax slab of an investor is considered for STCG. Gains realized after three years are considered long-term and are taxed at a rate of 20%.
Conclusion
Mutual fund redemption is when you convert your mutual fund holdings into cash in your bank account when you book the profit or need money for personal use.
The key is to check the mutual funds redemption time and taxes to avoid the withdrawal impact on your overall returns.
