How to Opt for Mutual Fund Redemption

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Introduction

Mutual funds are a common mode of investment for those who are not privy to instant updates on the stock market. They can choose a fund that is performing well and invest in it, instead of risking their money by investing directly in stocks. Mutual fund investments are usually open-ended and ongoing, although there may be term-based arrangements in certain cases. 

Hence, they don’t typically function under the scheme of term expiry. The investments stay active until the investor chooses to bring it to an end. For various reasons, the investor might decide to withdraw their investment from the fund. Understanding how this process works is crucial for anyone interested in mutual funds. 

What is Mutual Fund Redemption?

When an investor has decided to take back their money from a mutual fund they opt for Mutual Fund Redemption. This is similar to selling shares that we purchase from the market. Irrespective of the amount invested, the value that they receive on redemption would be based on the current value of the fund. Like shares, mutual fund investments are also made in units. These units can be redeemed for money when the investor chooses to do so. 

The redemption process can be carried out in different ways. The investor has to consider the reasons why they are opting for redemption and the terms that they agreed to, at the time of investment, while choosing how they wish to redeem their money. 

Types of Mutual Fund Redemption

Partial redemption: Investors sometimes withdraw only a part of their investment. This can be done in two ways. 

  • Unit-based - Here, the investor chooses to withdraw a certain number of units of the fund, and the current value of those units would be received as the redemption value. 

For instance, imagine that an investor holds 1000 units of a fund (purchased at 100 per unit), and they choose to withdraw 500 units. Now the current value of the fund is 120 per unit. The gross value of redemption would be 500 times 120, which would be 60000 INR.

  • Amount-based - Here, the investor chooses to withdraw a certain amount of money, and the number of units would be calculated based on a comparison between the current value of the fund’s units and the value requested by the investor.

For instance, imagine that the same investor wants to withdraw 30000 INR. Now the current value of the fund is 120 per unit. The gross value of redemption would be 30000. The number of units redeemed would be 250.

Full redemption: This type of redemption involves redeeming all the units purchased from the fund and the value received would be the current value of the units in the market. 

Systematic Withdrawal Plan: Here, the investor arranges with the fund’s managers that they would withdraw a fixed portion of their investment regularly as per an agreed schedule. 

Mutual Fund Redemption Process

The process of redeeming mutual funds can vary according to the mode of investment and the investor’s preferences.

Mutual fund platforms: In cases where the fund’s units were purchased through a mutual fund platform, the redemption can also be done through the same. The platform will credit the money to the bank account linked to it. 

Directly from the AMC: The Asset Management Company that offers the fund, would have its own online and offline modes of redemption. An investor can directly claim the redemption through these modes.

Registrar or Transfer Agencies, RTAs: RTAs maintain data on investors of mutual funds, and investors can approach them for mutual fund redemptions. Examples: CAMS, Kfin Tech

Automatic withdrawal: In cases of Systematic Withdrawal, the periodic withdrawals are executed automatically based on the schedule of withdrawal. 

Reasons for Redeeming Mutual Funds

Mutual fund redemptions are usually carried out due to one or more of the following reasons.

Completion of financial goals: Mutual fund investments are often made toward specific financial requirements, such as the purchase of a vehicle, or to fund a vacation. Once the investment grows enough to meet the objective, the investment is withdrawn. 

Emergency: In cases of financial emergencies, investors may need to withdraw their funds, even if it means there is a loss on redemption. 

Disappointed by the fund management: Sometimes, the investors may be unhappy with the way the fund is being handled and they may choose to redeem their investment.

Unstable market conditions: If the market is too volatile, investors may get spooked by the instability and withdraw their investment.

Strategic reasons: In case the investor wishes to realign their investment strategy, they may redeem their investment from the mutual fund and redirect the money to bring changes to their portfolio.

Key considerations before Redeeming Mutual Funds

Prior to redeeming their investment from Mutual funds, investors should pay attention to the following factors and ensure that their decision is well-informed.

Liquidity of the fund: In case of a financial emergency where the investor needs to redeem mutual fund investments, it would be wise to compare their investments, and pick the most liquid fund. This could help the investor avoid redundant losses.

Performance analysis: If the redemption is backed by the investor’s dissatisfaction in the fund’s performance, it’s recommended that the performance is analyzed carefully. Rather than making a decision based on one or two disappointing incidents, an unbiased look into the consistency and past highs and lows of the fund would be wiser.

Market conditions: There will be times when the market is volatile and yet certain funds will benefit from the same. Market conditions do not necessarily impact mutual funds adversely all the time. It would help to pay attention to the strategies of the fund before choosing to withdraw.

Advantages of Redeeming Mutual Funds

Mutual fund redemptions come with certain advantages. When done right, they can prove to be quite beneficial.

Avoiding losses: Timely redemptions can help an investor avoid losses. When an investor foresees a potential market risk, redeeming the investment on time can save them from losing the value of their investment. 

Tax planning: Tax laws are complicated in nature, and planning Mutual fund redemptions strategically can help an investor save money by reducing their tax liability.

Liquidity: There are circumstances where an investor would have a pressing need to be liquid and mutual fund redemptions can help them with improving their liquidity. This can be simpler than pursuing other ways to achieve the same.

Risks Associated with Mutual Fund Redemption

When Mutual fund redemptions are not timed/planned well they can result in a loss of money. These are some cases where such losses can happen.

Market risk: Mutual funds are invested in shares which are volatile in nature. In case a redemption falls on a time period where the market is performing badly, the value of the investment can fall too, and the redemption might result in a loss for the investor. 

Tax risk: Mutual fund investments are encouraged to be for the long term, and thus short term redemptions can come with higher tax burden. 

Opportunity cost: An untimely redemption can deprive the investor of an upcoming rise in the value of the investment, thereby taking away an opportunity to book profits. 

How can you avoid tax on Mutual Fund Redemption?

A bloated tax liability can be a threat to investors when the value of their investment is high. Mutual fund redemptions can result in tax burden if not planned right. Here are a few ways an investor can reduce the adverse impact of taxation while redeeming their investment. 

Invest for the long term: As mentioned above, investments are encouraged to be made for the long term, and thus short-term investments are taxed at higher rates. It would be advisable to hold investments until they qualify as long term investments. 

Invest in ELSS: Equity Linked Savings Schemes are funds that come with tax benefits. Investing in funds that offer lower tax rates, or deductions, can help reduce the tax liability.

Offsetting gains with losses: Strategically offsetting investment losses against gains can help decrease the taxable gains. This can be done by keeping track of the varied investments and the respective gains/losses from them.

Charges to redeem Mutual Fund units

During the process of mutual funds redemption, the investor is obliged to pay certain charges. Here is a list of those charges.

Contingent Sales Deferred Charge, CDSC: CDSC is an amount that would be charged typically for early redemption. The amount varies based on the time of redemption. It reduces over time, to encourage investors to hold their investments for longer periods.

Exit load: This is a fixed amount of fees charged at the time of redemption regardless of the period for which the investment was held. 

Transaction fee: Besides these two charges, there may be other special transaction fees that the concerned Asset Management Company might charge. 

Conclusion

Mutual fund redemptions are as tricky to decide as mutual fund investments. Careful scrutiny of the situation and a stable comparison of available options are necessary to avoid losses. Time of redemption plays a critical role in this process and planning it well can prove to be profitable to the investors.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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Frequently Asked Questions

Can I redeem a mutual fund after 1 year?

Answer Field

Yes. You can redeem a mutual fund after 1 year or any duration that you prefer. However, the timing of the redemption can come with certain advantages and/or disadvantages and it’s important to consider them. 

What is the new rule for mutual fund redemption?

Answer Field

Until Feb 1, 2023, the settlement of redemptions were to be done within three days of the completion of the redemption process. The new rule states that from Feb 1, 2023, the Asset Management Companies will clear settlements within two days.

Can I redeem a mutual fund anytime?

Answer Field

Yes. You can redeem a mutual fund anytime. The timing of your redemption will bring benefits or charges based on how well you plan the process.

What is the cut-off time for redemption?

Answer Field

The cut-off time for Mutual fund redemptions is 3 PM. If your order is placed before that the NAV of that day will apply to your settlement.

Is MF redemption taxable?

Answer Field

Yes. Mutual fund redemptions are taxable under capital gains. These are considered capital investments and hence this tax treatment.

Can I redeem mutual funds directly?

Answer Field

Yes. Mutual funds can be redeemed directly from the Asset Management Company through the offline/online modes presented by the company.

How is redemption calculated?

Answer Field

Redemption is calculated based on NAV. If the investor wants a certain amount the number of units is calculated based on NAV to match the amount requested. If the units are specified by the investor their NAV is calculated and is paid to the investor.

What happens after you redeem a mutual fund?

Answer Field

The applicable charges are paid and the net amount is transferred to the investor. The investor then takes care of the tax liabilities appropriately. 

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