Everything you need to know about redeeming mutual funds


Mutual funds have become a popular investment choice for many individuals due to their diversified nature and professional management. However, understanding the process of redeeming mutual funds is crucial for investors to effectively manage their investments and make informed decisions.
In this article, we will discuss everything you need to know about redeeming mutual funds, including the step-by-step process, online redemption options, and key considerations.
- Table of contents
- How to redeem mutual funds?
- How to redeem mutual fund online?
- How to redeem mutual funds offline
- Reasons for mutual fund redemption
- What are the types of redemption?
- Things to know about redeeming mutual funds
- How can you avoid tax on mutual fund redemption?
- When should you consider redeeming your fund units?
How to redeem mutual funds?
Redeeming mutual funds involves converting your fund units into cash, providing you with liquidity when needed. Redeeming mutual funds can be done either online or offline. The online method is generally preferred due to its convenience and efficiency.
How to redeem mutual fund online?
Log into your account: To initiate the redemption process, log into your mutual fund account. Whether you have invested directly with the Asset Management Company (AMC) or through a distributor, access your account through the respective platform.
Navigate to the redemption section: Once logged in, navigate to the redemption section. This can typically be found in the 'Transactions' or 'Portfolio' tab, depending on the platform you are using.
Select the scheme and units: Choose the mutual fund scheme from which you wish to redeem units. Specify the number of units you want to redeem. Keep in mind that the redemption may be partial or in full, depending on your financial needs.
Provide bank details: Enter the bank details where you want the redemption proceeds to be credited. Ensure that the information is accurate to avoid any transaction delays.
Confirm and authenticate: Review the details entered, including the scheme name, units, and bank information. Authenticate the transaction using OTP or any other authentication method specified by your mutual fund provider.
Transaction confirmation: Once authenticated, you will receive a confirmation of the redemption transaction. This confirmation serves as proof of the initiated redemption.
How to redeem mutual funds offline
If you prefer to redeem your mutual funds offline, follow these steps:
Obtain redemption form: Download or collect a redemption request form from the AMC's office or website. You can also contact an authorised distributor for the same.
Fill out redemption details: Provide accurate information about your folio number, scheme name, number of units to redeem, and bank account details.
Submit redemption form: Submit the duly filled and signed redemption form to the AMC's office or designated agent. The redemption proceeds will be credited to your registered bank account within the specified timeframe.
Reasons for mutual fund redemption
Investors may choose to redeem their mutual fund investments due to changes in financial situations or goals.
1. Meeting financial goals
Achieving short-term objectives: Redeeming funds for goals like buying a home or funding education.
Retirement planning: Redeeming as part of a phased withdrawal strategy during retirement.
2. Financial emergencies
Unexpected expenses: Redeeming funds to cover emergencies like medical costs or job loss.
3. Changing financial circumstances
Change in risk tolerance: Redeeming from high-risk funds as risk tolerance decreases, such as nearing retirement.
Change in investment horizon: Redeeming funds when plans change, requiring a shorter investment timeline.
4. Poor fund performance
Consistent underperformance: Redeeming funds that underperform their benchmarks or fail to meet expectations.
5. Rebalancing portfolio
Adjusting asset allocation: Redeeming and reinvesting to maintain the desired portfolio balance.
6. Switching to alternative investments
Exploring other opportunities: Redeeming funds to invest in other assets like real estate or gold.
What are the types of redemption?
- Part redemption: Investors can choose how many units or what amount to withdraw based on their needs and investment value.
- Full redemption: This involves selling all the units held in a mutual fund scheme. It closes your investment in that specific fund.
- Systematic Withdrawal Plan (SWP): A fixed amount or number of units is redeemed at regular intervals (e.g., monthly, quarterly). Useful for generating regular income from investments.
- Systematic Transfer Plan (STP): A fixed number of units is transferred from one scheme to another scheme offered by the same asset management company at fixed intervals. Each transfer is treated as a redemption from the source scheme.
Things to know about redeeming mutual funds
Exit load: Some mutual fund schemes may impose an exit load, which is a charge levied for redeeming units before a certain period. Check the Scheme Information Document to determine if an exit load applies.
Redemption processing time: The processing time for redemption requests may vary depending on the AMC and the type of fund. It typically ranges from 1 to 5 business days. For liquid and overnight funds, the facility of insta-redemption is also available. With this, you can redeem Rs. 50,000 or 90% of your investment (whichever is lower) instantly.
How can you avoid tax on mutual fund redemption?
While taxes on mutual fund redemptions can't be completely avoided, there are ways to reduce the tax burden:
For equity funds
Capital gains on units held for less than a year are taxed as short-term capital gains and the tax rate is 20%. Units held for more than a year are taxed as long-term capital gains (LTCG). LTCG of up to Rs. 1.25 lakh in a financial year is tax-exempt and thereon, the tax rate is 12.5%. So, you can reduce your tax liability by ensuring that you do not redeem your units in less than a year. If you plan your redemption amount such that your capital gains are below Rs. 1.25 lakh, you will not be liable to pay tax.
Systematic Withdrawal Plan (SWP)
By withdrawing small amounts regularly, you can ensure that your annual LTCG from equity funds stays below Rs. 1.25 lakh, avoiding tax.
Tax loss harvesting
Offset capital losses from other investments against your mutual fund gains to reduce your tax liability.
When should you consider redeeming your fund units?
You may consider redeeming your mutual fund units in the following situations:
- Upon achieving financial goals
- Financial emergencies
- Changing financial circumstances
- Consistent underperformance
- Portfolio rebalancing
- Switching to alternative investments
- Redeem funds if you wish to explore other options like real estate or gold.
Conclusion
Redeeming mutual funds is a straightforward process that offers investors the flexibility to access their investments when needed. Whether you choose to redeem manually or opt for the convenience of online transactions, understanding the steps involved is key to a seamless experience. Keep these guidelines in mind, and always refer to the specific terms of the mutual fund scheme you are invested in for accurate information on redemptions.
FAQs:
Can I redeem my mutual funds anytime?
Mutual funds typically allow redemptions on any business day. However, it's essential to check the specific fund's terms and conditions, as some funds may have lock-in periods or exit loads.
Are there any tax implications when redeeming mutual funds?
Mutual funds are taxed based on whether they are equity or debt oriented. Returns from debt funds are taxed at the applicable slab rate irrespective of the holding period. Returns from equity funds held for over 1 year are exempted up to Rs. 1 lakh and taxed at a flat rate of 10% subsequently.
Is there a limit on the number of times I can redeem mutual fund units?
Mutual funds typically do not impose restrictions on the frequency of redemptions. However, certain funds may have specific guidelines with regard to charging of exit load based on the tenure of investment. Check the fund's SID for detailed information.
Can I redeem all my mutual fund units at once?
Yes, you can redeem all or a portion of your mutual fund units. The minimum redemption amount may vary depending on the scheme.
Can I redeem mutual fund units after one year?
You can generally redeem mutual fund investments after one year, but consider these points:
Exit load: Funds may charge an exit fee if redeemed within a specific period (typically 1 year).
Lock-in period: Some funds (such as ELSS and solution-oriented funds) have a mandatory 3-year lock-in period before redemption.
What is the new rule for mutual fund redemption?
The new rules are as follows:
- If your application for redemption is received by the AMC before the cut-off time of 3 pm and funds are available for utilisation, the NAV (Net Asset Value) of that day will apply.
- If your application is submitted after the cut-off time, the NAV of the next business day will apply.
- If the funds for purchase are not available at the time of application, the NAV of the day when the funds become available will apply, no matter when the application was submitted
What is the cut-off time for redemption?
In India, the standard mutual fund redemption cut-off time is 3:00 PM.
Is MF redemption taxable?
Yes, capital gains on mutual fund units are taxable upon redemption. The tax rates are follows:
Equity funds: Post Budget 2024, short-term capital gains (gains on units held for less than a year) are taxed at 20% and long-term capital gains (on units held for more than a year) taxed at 12.5%, with an exemption on gains of up to Rs. 1.25 lakh.
Debt funds: For investments made post April 1, 2023, all capital gains are deemed to be STCG and taxed as per the investors applicable slab rates.
Can I redeem mutual funds directly?
You can redeem mutual funds directly with the AMC by using their online platform or submit a redemption request offline.
How is redemption calculated?
The redemption amount or the number of units received depends upon the prevailing NAV. Redemption amount = no. of units X per-unit NAV.
Are there any charges for redeeming mutual funds?
An exit load may be charged if the units are redeemed before a specified period. Not every scheme has an exit load. You can find those details on the scheme information document or the company’s website.
When is the right time to redeem mutual funds?
The right time to redeem mutual funds depends on your financial goals and requirements. Avoid redeeming during market downturns or for short-term gains. Always consider your investment horizon and consult with a financial advisor.
What information is required for offline redemption?
For offline mutual fund redemption, you'll need to provide details like your full name, PAN number and folio number. You'll also need to specify the scheme name, plan, and redemption details such as the units or amount to redeem and bank account information.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.