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What is mutual fund redemption?

Mutual fund redemptions are initiated by investors who choose to sell a certain quantity of units from their mutual fund investment. Usually, the investor's financial objectives, liquidity requirements, or market circumstances determine when and how much to redeem.

Redemption request:The mutual fund company or the appointed registrar and transfer agent of the fund receives a redemption request from investors. The quantity of units or amount to be redeemed is specified in this request.

Net Asset Value (NAV): The number of units redeemed, or the redemption amount, depends on the scheme’s Net Asset Value (NAV). If the redemption transaction is received before 3 pm on a business day, the NAV on the same date is considered. If it is received after 3 pm, the NAV of the next business day is considered.

NAV = {(Market or Fair Value of Scheme's Investment) + (Current Asset) - (Current Liabilities
and Provision)} / (Number of Outstanding Units Under the scheme)

Redemption proceeds: The redemption amount is obtained by multiplying the number of units redeemed by the applicable NAV. So, if the NAV is higher on a given day, the investor will receive a higher amount for the same number of units redeemed. Similarly, a lower NAV will result in a lower amount for the same number of units. The mutual fund house pays the investor the redemption proceeds after completing the redemption request.

Exit load: Investors who redeem their units within a certain holding period may be assessed an exit load by some mutual funds. Exit loads, which might fluctuate amongst mutual funds, are meant to deter short-term trading.

Tax repercussions: Profits from mutual fund redemptions may be subject to capital gains tax. The holding duration and the kind of mutual fund (debt or equity) affect the tax treatment.

Things to remember before redeeming mutual funds :

  • Demands for liquidity: Investors often redeem their mutual fund units to finance certain financial objectives or to satisfy urgent liquidity demands.
  • Market circumstances: Prevailing market circumstances may influence the choice to redeem mutual fund units. Investors may save investments to prevent bear market losses or realize gains in bull markets.
  • Effect on portfolio: The redemption of mutual fund units impacts an investor's whole investment portfolio. It is important to consider the impact on financial objectives and asset allocation.
  • When to redeem a mutual fund: The redemption amount depends on the applicable NAV at the cut-off time of 3 pm. A scheme’s NAV can change daily, so investors should be aware of the cut-off time to know when redemption requests must be submitted.

To make informed decisions about when to redeem funds, investors must know the redemption process. Investors must also align their redemption decisions with their financial goals and expenses. Additionally, knowledge about associated costs, tax implications, and market circumstances can help investors choose a suitable time to redeem funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.