What is Mutual Fund Redemption and How to Redeem Fund Units (2024)

Types Of Redemption

1. Unit-Based Redemption

In this type of redemption, you can specify how many units of mutual funds you want to redeem. The amount which you will be getting will be determined by the number of units we are wishing to redeem and the prevailing NAV of the mutual fund unit.

2. Amount-Based Redemption

In this type of redemption, we can specify the amount which we want to redeem. Thus, the number of units is automatically debited based on the NAV to match the amount we wished for.

3. Redeem All

In this type of redemption, we can redeem our entire investment from the mutual fund.

Taxability

It is important to note that there are taxes and exit loads involved in redeeming your fund units.

For Equity-based Mutual Fund investment, if the tenure of the investment is less than a year, a short-term capital gain tax is applicable.

This tax rate is 15%. Whereas, if the tenure of the investment is more than a year, a long-term capital gain tax of 10% is applicable. However, for the long term, the taxes are only applicable if the gains exceed 1 lakh Rupees.

For Debt-based Mutual Funds, the short-term period is 3 years. The short-term gain tax is according to the income tax slab in which we fit. Investment gains above 3 years are termed long-term gains, and they are taxed at 20%.

Keep in mind that cess will be applicable over and above the tax rate.

Exit Loads Associated With Redemption.

Most mutual funds expect you to invest typically beyond a year. If you want to exit the fund before this time period, a certain penalty would be levied. This penalty is called the exit load.

Exit load is generally around 1% of the total amount withdrawn. The minimum period for equity funds is generally around a year; however, for debt funds, this may vary. There are short and ultra-short debt funds available, whose minimum period is usually much shorter.

You should check both these parameters before planning to disinvest your money from the mutual fund scheme.

Methods To Exit From Mutual Funds

1. Through Trading Account or Demat

If we had bought mutual fund units from our DEMAT or trading account via a broker, we would need to raise a sell order through the same broker. The corresponding amount is credited to our Bank account linked with the DEMAT account.

2. Directly via AMC Or Distributors

Most of us directly buy Mutual funds from the AMCor the Mutual Fund House itself or through distributors like Groww.

All these provide us with an online platform where you can buy, monitor or sell your mutual funds.

You can sell our mutual funds according to the methods mentioned above through these online platforms directly. Here is a short video on how you can redeem your funds on Groww.

3. Registrar or Transfer Agencies (RTAs)

RTAs like CAMS and KFin Technologies Limited maintain transactions and records on behalf of mutual fund houses. We can redeem our Mutual Funds through them also.

After having discussed all parameters of redemption, how to redeem our mutual funds, where to redeem from, etc., the question boils down to when should we redeem.

When Should You Consider Redeeming Your Fund Units?

1. Below-par Performance By The Mutual Fund

Redeeming your funds just because of temporary market flux is uncalled. This is especially true if you are a long-term investor since the markets eventually stabilize.

However, you might consider redeeming your funds if your fund underperforms consistently. By consistent underperformance, I mean that the fund delivers a negative alpha α consistently.

Alpha, α is the difference between the fund’s or portfolio’s return with the benchmark like SENSEX or NIFTY50. For instance, if Sensex goes from 36000 to 39000 the benchmark is said to deliver an 8.3% return.

If your mutual fund delivers, say 6% return in the same time period, it is said to underperform with α= -2.3%.

This is a case where you may want to pause and take a look at how your investments are performing and whether it would be a good idea to direct your money to a better-performing fund that helps you achieve your financial objectives.

2. Financial Emergency

There might arise a situation where we need to move our funds from the investments to some urgent capital-intensive expense like a medical emergency or loss of a job. If you have been investing in a liquid fund for emergencies, certain liquid funds allow you instant redemption that you can put to use.

3. Changes in Strategy

The strategy mutual fund houses devise in picking stocks from large, small or mid-cap and targeting sectors should ideally remain constant.

However, they might change the fund strategy to capture the market more efficiently or change the fund manager. Although the AMC usually informs investors in case of any changes, investors may redeem their units. Especially when he/she feels the fund’s strategy no longer aligns with the financial goals.

4. Financial Goal Completion

The ultimate goal of any investment is to achieve your financial goals. If you have invested for a long and you have received your targeted return, you may want to decide whether or not to redeem your investment.

Word of Caution

The returns of a mutual fund are the net result of how the stocks perform. Some stocks pick up while some stocks drag. It is very likely that the portfolio of stocks your fund has might have delivered a sub-optimal performance than the benchmark. This can be a one-off period in which the prime stocks of your portfolio underperform.

Keep in mind that the mutual fund managers are trained people, and they will rebalance the portfolio for target performance.

Hence, any temporary market movement should not result in you panicking and exiting a fund. However, if the fund house consistently underperforms, it makes sense to exit the fund.

Happy Investing!

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.