Redemption of Mutual Funds – Complete Information
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Selecting the time to redeem a mutual fund is a critical decision based on a number of factors. You need to conduct thorough research on the fund’s performance and the reasons for redemption.
Traditionally, investors act on a gut feeling and redeem units as soon as they see that the fund is performing poorly, or the market is volatile. But this is wrong. Investors need to know that even volatile markets offer some chances for good returns.
Mutual funds are professionally managed by fund managers whose decisions are proactive and are based on the perceived market movements. But in case the fund performs poorly consistently for a longer period, you may choose to exit.
What is Mutual Fund Redemption?
Mutual Fund Redemption is the process of withdrawing units of a in order to obtain your returns from the fund. When you go for a mutual fund redemption, you will receive funds in your account almost instantly.
Mutual Fund Cut-Off Time
Depending on the Indian Standard Time (IST), the cut-off time of mutual funds are set. Indian stock market working days are also considered when determining the cut-off time. Depending on the mutual fund scheme and the payment method, the cut-off time will vary.
The period by which mutual fund units can be sold or bought is the cut-off time. The NAV will be provided on the same day if orders are placed within the time period. The transaction must be completed by 3:00 p.m. to receive the NAV on the same day. The deadline is decided by RTAs and AMCs.
Mutual Fund Transactions – Cut-Off Time
The cut-ff times for different mutual fund schemes are mentioned in the table below:
| Scheme | Cut-Off Time |
| Liquid Funds and Overnight Funds (Redemption including Switch-Outs) | 3:00 p.m. |
| Liquid Funds and Overnight Funds (Subscription including Switch-Outs) | 1:30 p.m. |
| Other Schemes (Redemption including Switch-Outs) | 3:00 p.m. |
| Other Scheme (Subscription including Switch-Outs) | 3:00 p.m. |
What are the Types of Mutual Fund Redemption?
The types of mutual fund redemption are as follows:
- Unit based redemption: You can choose how many mutual funds units you want to redeem in this type of redemption. The redemption amount will depend on the number of mutual funds units we want to redeem and the current Net Asset Value (NAV) of a mutual fund unit.
- Amount based redemption: In this redemption type, we can set the redemption amount. The number of units is debited based on NAV to the desired redemption amount.
- Redeem all: In this mutual fund redemption, we can get our entire investment back.
How to Redeem your Mutual Fund Units?
Mutual fund redemption should be done in a smart way to ensure that you get good returns. One should take note that the prices of mutual fund units are fixed only once a day.
Hence, as a financially sensible investor, you should ideally request a redemption within the time set by your fund house or before the financial markets close their transactions.
Your money will be redeemed at the net asset value (NAV) of your fund for that particular day. NAV includes the total of all the assets of a certain fund less the liabilities.
There are multiple ways to redeem mutual funds. They are as listed below:
- Redemption through demat or trading account: If you have purchased mutual fund units using your Demat account or trading account through a broker, then you will need to raise the sell order via the same broker and the corresponding amount will be credited to your Demat linked Bank account.
- Redemption through Asset Management Company (AMC) or distributor: Most of us buy mutual funds directly from the Asset Management Company (AMC), the Mutual Fund house or distributors. All of these give you an online platform on which you can buy, track, and sell your mutual funds.
- Redemption through Registrar or Transfer Agencies (RTA): RTAs such as CAMS or Karvy keep track of transactions and records for mutual fund houses. You can also redeem your mutual funds through these platforms.
How to Redeem your Mutual Funds Offline?
If you want to redeem your mutual funds physically, you will be required to get a Redemption Request form, in which you will be required to fill details such the unit holder’s name, name of mutual fund scheme, folio number, number of units to be redeemed from the scheme, plan details, etc. Once the form is filled, you will have to sign it and submit it to the designated office of the Registrar or the asset management company (AMC).
You can also present it at any official point of a fund house that accepts transactions. The funds resulting from your redemption will be transferred to the fund unitholder’s registered bank account.
How to Redeem your Mutual Funds Online?
You can also redeem your mutual funds online by visiting the official website of your mutual fund. In case you got a mutual fund by going to a third-party mutual fund web portal, you can redeem it on the portal itself.
- You will have to choose online transactions on the website.
- To access your mutual fund, you will need to log in to the website with the help of your folio number and/or your Permanent Account Number (PAN).
- Next, you will have to choose your scheme and select the number of units that you would like to redeem.
- You will then have to confirm your transaction.
Apart from redeeming your mutual funds online through your mutual fund’s website or your web portal, you may also redeem via central service providers such as Karvy, CAMS (Computer Age Management Services Pvt. Ltd.), etc.
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How long will you take to Receive your Fund Redemption Amount?
Mutual Fund Redemption Time is as follows:
- When you redeem your mutual fund, you will typically receive your unit’s funds within 1 to 3 working days.
- If you redeem a debt-related fund or a liquid fund, you will get your money within 1 to 2 working days.
- On the other hand, when you redeem an equity mutual fund, you will get your amount within 4 to 5 working days.
How can I Avoid Tax on Mutual Fund Redemption?
The following are ways to avoid tax on mutual fund redemption:
- Offset gain with losses
- The short-term capital loss in mutual fund can be offset against either short-term or long-term gains from any other assets to avoid tax obligations.
- In the same way, long-term capital loss can only be set off against the long-term capital gain from another asset which will help minimising the taxability on mutual fund redemption.
- Utilising Tax-Saving Funds:
- To minimise tax obligations avail exemptions, invest in ELSS fund as they offer tax benefits under section 80C of the Income Tax Act.
- Keep your investments for longer duration
- Investors can avoid tax on mutual fund redemption by holding your investment for more than one year which will make it qualify for long-term capital gains which has lower tax rates than short-term gains.
Taxability
The following are the required details on the taxability of mutual fund redemption:
- Taxes and exit loads are involved in mutual fund unit redemption.
- A short-term capital gain (STCG) tax is applicable, if the investment tenure is less than a year.
- The tax rate for STCG is 15%.
- If investment tenure is more than one year, then a long-term capital gain (LTCG) tax at 10% is applicable.
- LTCG is applicable only if gain amount is more than Rs.1 lakh.
- For Debt-based mutual funds if the investment tenure is more than three years, then LTCG of 20% is applied.
- Cess will also be applied over the tax rate.
Difference Between Stock and Mutual Fund Selling
Here are the details regarding the basic differences between stock and mutual fund selling:
- Stock Market: Transactions in a stock market require a buyer and a seller and the stocks are sold at a mutually agreed price. The transaction in a stock market involves an order book that consists of the purchase and selling price of the broker.
- Mutual Fund: Buyer is the mutual fund itself and the seller is the company who sell the corresponding units in current Net Asset Value (NAV). The amount gets credited in the account within three to four working days.
Exit Loads Associated with Redemption
The following is the list of details related to the exit load associated with redemption:
- If you exit the fund before the specified tenure, then a penalty will be charged which is known as exit load
- The exit load applied is 1.00% of the amount withdrawn
- The tenure for equity funds is one year while for debt fund it may vary
- The tenure is much shorter for short and ultra-short debt funds
Considerations Before Redeeming Mutual Fund Units
The following are the points that should be considered before redeeming mutual funds units in case you are confused to determine when the right time is for redemption:
- Fees and charges: Consider all your expenses and financial obligations before redeeming to determine whether it is beneficial to redeem the fund to fulfill all your financial commitments.
- Financial goals: Mutual fund redemption can be done to fulfill all your short- and long-term goals, such as funding vacation, repaying education loan, or any other.
- Asset allocation and market sensitivity: Depending on the market condition and risk tolerance of the investor, reallocation of funds to different assets or redemption of funds can be done to minimise the chance of potential loss due to market fluctuations.
Reasons for Mutual Fund Redemption
The following are the reasons for mutual fund redemption:
- Performance-based acquisition: Redemption is done when a particular is consistently under performing and fails to provide the desired returns.
- Redemption based on return: Redemption is also done in case the fund has delivered exceptional returns and you wish to lock in the return to avoid market fluctuations impacting on the returns.
- Redemption based on value: Redemption is done when the maturity value has been achieved for which investment was made for fulfilling certain financial requirements, such as repayment of loan or education.
How much money will you receive when you redeem your Mutual Fund Units?
You can make a simple calculation to know the approximate amount of your mutual fund investments. You only have to multiply the number of units that you hold on a particular day with the NAV of that day for that scheme. This amount will depend on many other factors and they include:
- Exit load
- Securities Transaction Tax (STT)
- NAV that is applicable on your fund units, which refers to the NAV fixed for the day and time when you apply for a redemption
Charges to Redeem Mutual Fund Units
As an investor, when you plan to redeem any of your mutual fund units, you will have to be prepared to pay a load or certain charges in a few situations.
If you decide to redeem a fund before you complete 1 year of the investment, you may be asked to pay an exit load of 1%. This will depend on the type of your scheme and your mutual fund company.
Exit loads are typically charged for equity mutual funds. When you redeem such a fund, the exit load will be subtracted from the NAV for the redemption of each fund unit. You may not have to pay any exit load for ultra-short-term funds or liquid funds.
How will you get your Mutual Fund Redemption Proceeds?
After you redeem unit(s) of your mutual fund, you will receive the money in your registered bank account. For this, the investor will need to provide his or her bank’s IFSC code and account number. Also, the bank and branch will require RTGS and NEFT facilities.
In case the fund house does not have sufficient bank information, then they send the money in the form of cheques to the investor.
Point to Note when Redeeming your Mutual Funds
Some of the things to remember when redeeming mutual funds are:
Applicable NAV – As the Net Asset Value (NAV) for each day is announced post the closing of the day’s trade, the time of the day when you request for redemption is crucial. However, the NAV of the day is applicable only for redemption requests that come by 3pm in a day, or else the next day’s NAV is applicable.
Bank Accounts – You must keep your bank account that is linked and registered with your AMC, active. When you redeem your mutual funds, the proceeds of the fund is sent to your bank account registered with the AMC. In case that account is inactive, you may be required to submit a cancelled cheque of your new bank account or passbook or you might also have to present a declaration from the bank with the signature of your bank manager.
Turnaround Time – When you send your redemption request, it takes around three working days for the earnings from the funds to get credited to your registered bank account. However, it depends on the time of the week you have filed for redemption.
Funds with Lock-in Period – Open ended schemes can be redeemed at any point of time, whereas some schemes like ELSS (Equity Linked Savings Scheme) cannot be redeemed up to three years from the investment date.
Charges on Redemption – Redeeming your funds might attract certain charges such as exit loads and taxes. The amount charged depends on the duration after which you have requested for redemption of funds. It is advisable to inquire about the charges before making the decision of redeeming your funds. You should approach your fund manager or financial advisor for advice before planning to exit your fund.
You can also do online research to understand if you should redeem your fund units or not. You will also be able to find reliable guidelines and tips for mutual fund redemptions online. Ensure you are redeeming for an appropriate reason that will not disturb your financial plan. Some investors redeem from one scheme to invest in another in the same category, this practice is called ‘churning’, however, it is not advisable unless there is some logic to it.
When you plan to redeem your mutual fund units, you need to ensure that your scheme does not have any lock-in period. Some of these funds include Equity Linked Saving Scheme (ELSS) funds. They come with a lock-in period of 3 years. Hence, you need to understand the nature of your fund before you start to think about redeeming it. On the other hand, you can redeem open-ended funds whenever you want.
Redemption Process: There are various ways of redeeming mutual funds, however it depends on the mode of purchase:
Redemption if Funds Bought Through AMC – Investing in mutual funds through AMC is the most common mode. If you want to redeem your funds offline, you are required to submit a fully signed redemption request to the AMC’s office. A redemption form usually comprises of details such as name, plan, scheme details, folio number and number of units to be redeemed. Signature of all the holders are needed on the form. Once the form is submitted, the redemption proceeds is credited into the registered bank account.
Redemption if Funds Bought Online – When purchased online, mutual funds can redeemed through the AMC’s website or a trading account. As it is an online process, you are required to log in and select the desired fund and number of units to be redeemed and confirm.
Listen to your fund manager or financial advisor before planning to exit your fund. Ensure you are redeeming for an appropriate reason that will not disturb your financial plan.
Some investors redeem from one scheme to invest in another in the same category, this practice is called ‘churning’, however it is not advisable unless there is some logic to it.
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FAQs on Redemption of Mutual Funds
- How are taxes calculated on mutual fund redemption? The taxability and the applicable tax rate depend on the holding period of the mutual funds. Equity funds held for one year or more will come under Long-Term Capital Gains (LTCG) tax, while funds held for a duration of one year or less will come under Short-Term Capital Gains (STCG) tax.
- Can I redeem only a portion of my mutual fund investment? Yes, if the fund allows partial redemption, then you can redeem only a portion of your mutual fund investment. Before redemption, you need to specify the amount or unit of redemption.
- Is there any lock-in period for mutual fund redemption? The existence of lock in period varies from one mutual fund to another. Some funds, such as tax-saving ELSS (Equity Linked Saving Scheme) funds, have a lock-in period of three years, while mostly mutual funds do not have and lock in period and you can redeem your fund anytime.
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