While many other investment products are available to Indian investors, mutual funds offer a wide range of schemes. In comparison to other investment options, mutual funds have the potential to provide substantial returns and are practical, well-regulated financial products.
Mutual funds may offer high liquidity and easy entry/exit options depending on the type of fund selected. Therefore, you always have the choice to liquidate your mutual fund investments in an emergency.
If you own mutual funds, you will have to retrieve your units at some point. Sound financial planning is the significance of knowing when and how to sell.
You can learn everything about how to redeem mutual funds from this article.
Mutual Fund Redemption:
Mutual fund redemption is when an investor chooses to sell part or full units of their investment. The investor gets charged a particular amount throughout the redemption process if the scheme comes with an exit load.
Also, the redemption of mutual funds units comes with tax when the capital gain is more than 1 lakhs.
The redemption process is simple; you can enter the number of units to redeem in the mutual fund portal and confirm with an OTP from a registered mobile. The amount will be credited to your account within 3 days.
Types of Mutual Fund Redemption:
Redemption Based on Unit:
You can select how many mutual fund shares you want to redeem using this type of redemption. The amount you will receive will depend on the number of units you retrieve by the current Net Asset Value (NAV).
Redemption Based on Amount:
This type of redemption allows us to specify the amount you want to redeem. As a result, units are immediately deducted based on the NAV to reflect the requested amount.
Redeem All:
You can withdraw our entire mutual fund investment under this type of redemption.
An Essential Guide to Withdraw Mutual Funds:
Contact your Financial Advisor – First, get in touch with the financial advisor who advises you on investing or managing your mutual funds. You can speak directly with the mutual fund company if you operate independently.
Check for Any Charges – Determine the costs incurred when you sell the shares. You may also have to pay a sales charge if you choose a fund with deferred sales costs.
Additionally, this is based on the investment period and the mutual fund provider you selected.
Decide How Many Units You Wish to Sell – The units’ charges are determined at the end of each business day. To prevent anyone else from selling it, you must complete a document confirming that you want to sell the units.
Instruct your Advisor on How to Spend the Funds – You must decide how to use the money you get. You can ask the advisor or company to deposit the funds in your bank account, issue you a check, or invest the money in other mutual fund schemes.
Considerations Before Redeeming Mutual Fund Units:
Mutual fund unit redemption is a major decision that needs to be made only after careful consideration.
Before choosing to redeem, consider the following things:
Type of Fund:
The type of fund you have invested significantly impacts whether you can retrieve your funds at any particular time. For example, if you have invested in closed-ended funds such as ELSS or fixed maturity funds, you can only redeem them once their lock-in term has expired.
Exit Load:
There is no lock-in period for open-ended funds. However, if the funds are retrieved within a certain time, they will be subject to an exit load.
For example, an exit load of 1% (variable) may be applied if a fund is redeemed within a year of the purchase date. Because exit load is not a legal charge, the amount, period, and percentage of load differ by the scheme.
Pay-Out Time:
The pay-out usually takes 2-4 business days to appear in the beneficiary’s account. Hence, if money is needed for a particular reason, it is good to plan ahead of time.
Tax Implication:
Equity-based mutual funds are not taxable to the investor if they are held for longer than a year. However, if it is redeemed after a year, the capital gains of more than 1 lakh will be subject to long-term capital gains tax of 10%, as well as a surcharge and education fee.
In the case of debt funds, LTCP (Long-term capital gain) is more than 3 years. If any investor redeems their investment with a capital gain of more than 1 lakh will be taxed 20%.
Methods to Redeem Mutual Fund Units:
The following are several options for investors to redeem their mutual fund units, and are as follows:
- Asset Management Company (AMC)
- Demat Account
- Online Portals
- Agent
- Registrar or Transfer Agent Company.
Redemption Through Asset Management Company (AMC):
For online mutual fund redemption, go to the AMC website. You must log in to the website using the username and password while opening the account with AMC. Choose the number of units you want to sell.
If your plan has no locked-in period, you can either redeem them all at once or make partial withdrawals.
You can also retrieve the funds offline by going to the AMC office. After your request has been approved, you will receive the money at your registered address by NEFT or check.
The online mutual fund redemption process is generally quicker than the offline process because the cash is credited within a day or two.
Redemption Through Demat Account:
If you purchased the units through a Demat account, you must redeem them through the same account. You will receive the money through NEFT once your application to sell the shares has been processed. The funds will be transferred to the bank account linked to that Demat account.
Redemption Through Online Portals:
The best part is that redeeming your mutual investments is quick and easy, especially if you do it online. Below is the process for online mutual fund redemption:
Step 1: Open the website for the mutual fund.
Step 2: Log in to the website’s “Online Transaction” page and enter your secure information, like your folio number or PAN card number.
Step 3: Choose the scheme and the amount you want to redeem, then complete the transaction.
Once you’ve completed these steps, the funds will often be credited to the bank account linked to your scheme within 1 to 5 working days. When you redeem liquid fund units, your money is credited in T+1 (Transaction Date + 1), which is one working day following the redemption, whereas other funds take T+3 days.
Redemption Through Agent:
The process includes filling out a mutual fund redemption form with the name of the plan and scheme, the folio number, the number of units to be withdrawn, and other information. Following that, the agent will send the form to the office.
Once the redemption procedure has begun, a check will be sent to the investor’s registered address, or the redemption funds will be paid to the beneficiary account through NEFT.
Redemption Through Registrar or Transfer Agent Company:
People have the choice to redeem mutual funds from several AMCs through the Computer Age Management Services (CAMS) office. You can download a redemption form, fill it out, and sign it before bringing it into any CAMS office. These services are also offered by other organizations, such as Karvy Computershare.
By choosing these agencies, the investor will gain access to a variety of services for different AMCs through a single point of contact.
When to Redeem Mutual Funds?
When you have achieved the investment goals as required, for example, it could be a long-term goal to buy a house or a short-term desire for a trip.
Regardless of market conditions, the investor should consider redeeming units when they are closer to their objectives.
Even though an investor has the opportunity to redeem their shares at any time after the lock-in period (if any) is over, it is important to carefully consider this choice before making the request.
This will prevent an investor from making early withdrawals that would impact the total payment costs.
Investors are encouraged only to redeem their shares in the following circumstances:
Poor Performance of the Fund:
There may be instances when you feel your plan is underperforming compared to its benchmark or category average for more than 3 years. This would indicate that you have invested your money in a fund that is making losses or yielding low returns.
A short gap in performance does not necessarily predict a longer-term continuation of the same. However, it is wise to exit by selling the available units if a fund continuously performs poorly.
Financial Crisis:
As time goes on, so do our priorities, aims, and goals. Selling units could fulfill this need if there is a sudden need for cash due to health issues or other urgent matters.
Scheme Changes:
Consider withdrawing your money from the present scheme and investing it in a different one if the scheme changes and is no longer appropriate for your investment goals. However, it is advised to wait a year to decide after observing the fund’s performance.
The Fund Fails to Meet Its Objectives:
Although investing in mutual funds over the long term is recommended, some market-tracking active investors may disagree. They can plan redemption if they feel the long-term prospects are inconsistent with their financial goals.
Market Instability:
This should be the least important factor in a fund investor’s leaving decision. Market analysts and professionals recommend buying high-quality yet inexpensive stocks when the market drops. The traditional market wisdom is to buy low and sell high. But most of us act oppositely.
What Happens When a Mutual Fund Is Redeemed?
Investors might make capital gains by redeeming mutual funds. The taxation of capital gains can be divided into two categories:
- Short Term Capital Gains (STCG).
- Long Term Capital Gains (LTCG).
The taxes vary depending on the type of fund; for example, equities mutual funds and debt funds have different tax requirements, and STCG and LTCG represent other things. The investor may also be required to pay an exit load and additional fees when withdrawing from a mutual fund.
Therefore, it is important to think about the tax implications and the costs that will be associated with redeeming mutual fund units.
Tax on Redemption of Mutual Funds:
Investors who sell mutual fund units for more than they paid for them make capital gains, subject to the applicable tax laws. There are numerous varieties of mutual fund schemes on the market. Let’s learn about capital gains taxation from various mutual fund plans.
Capital Gains in Different Types of Mutual Funds:
Equity Mutual Funds:
STCG – If the waiting period is less than 12 months.
LTCG – If the waiting period is equal to or more than 12 months.
Debt Funds:
STCG – If the waiting period is less than 36 months.
LTCG – If the waiting period is equal to or more than 36 months.
Hybrid Mutual Funds:
STCG – If the waiting period is less than 12 months.
LTCG – If the waiting period is equal to or more than 12 months.
Taxation on Different Types of Mutual Funds:
Equity Mutual Funds:
STCG – 15% of the overall gain plus any taxes and charges.
LTCG – Profits up to Rs. 1 lakh is not subject to tax. Profits over Rs 1 lakh are subject to a 10% tax rate, plus taxes and charges.
Debt Funds:
STCG – Taxed based on the investor’s net annual income tax slab.
LTCG – 20% of the entire gains, plus any taxes and fees.
Hybrid Mutual Funds:
STCG – 15% of the overall gain plus any taxes and charges.
LTCG – Profits up to Rs. 1 lakh is not subject to tax. Profits over Rs 1 lakh are subject to a 10% tax rate, plus taxes and charges.
Cost of Mutual Fund Redemption:
Exit Load in Mutual Fund Redemption:
Finance companies charge investors an exit load when they redeem mutual funds. It is commonly expressed as a percentage of the investor’s total Net Asset Value (NAV).
Furthermore, exit load is typically charged for a particular period, i.e., only when the investor exits early.
You can check the fund scheme’s Net Asset Value (NAV) to find out exactly how much will be credited to your account when you redeem mutual fund units.
Use the below formula to calculate:
NAV = (Market Value of the Portfolio – Liabilities) / Total Number of Fund Units.
If you submit your redemption request before the cut-off time, which is normally 1:30 PM for liquid funds and 3:00 PM for all other funds, the fund’s NAV at the end of the day is used to calculate your earnings.
Additionally, your profits will reflect the resulting fee and be adjusted if you redeem your units during the exit load period.
The applicable exit load on your fund can be found in the fund scheme description and calculated using the following formula:
Percentage of Exit Load (as mentioned in the scheme document) X Number of units you own X Scheme’s NAV.
Total Expense Ratio in Mutual Funds:
The expense ratio is the yearly fee the asset management company charges the investor. Exit load and expense ratio both have percentage definitions.
The sum is charged to cover the costs associated with managing the fund, such as the asset manager’s salary, marketing expenses, administrative costs, fees associated with purchasing and selling securities, etc.
The SEBI has fixed a maximum Total Investment Expense Ratio (TER) of 2.25% those fund companies can charge.
Conclusion:
Mutual funds are among the most secure and profitable investment options. It is simple to redeem a mutual fund scheme. Exiting a mutual fund scheme requires understanding when to do so, why, and other relevant details.
Data from Statista’s Research Department show that in the financial year 2022, India’s net resource mobilization through mutual funds reached a record-high $2.54 trillion, exceeding that of the financial year 2020. Mutual funds are essential for maximizing savings and investing them in the stock market.
If you wish to withdraw the money, wait until you have a solid justification. Hold short-term investments for longer if not urgently needed and allow them to grow.
Before you grab knowledge on ways to redemption of funds, you should know how mutual fund system work in India.