Mutual funds are one of the best market-linked investment avenues, as they can earn great returns. This is the reason why mutual funds have got a lot of traction among investors looking for wealth appreciation. 

 

As of September 30, 2023, the total AUM in mutual fund schemes has grown to ₹46.58 Trillion. In fact, many investors choose to invest for the long term, which is linked to a specific financial goal. Once they reach the target, one can simply redeem their investment and get their returns.

Redemption of Mutual Funds

Mutual fund redemption is the process of liquidating your investment by selling your mutual fund units. When you redeem your mutual fund units, the Asset Management Corporation (AMC) credits the amount to your registered savings account. 

 

The process is quick and completely digitised, allowing you to liquidate your investment without any delays. 

Types of MF Redemption

The following are the types of MF redemption withdrawals you can make: 

  • Unit-Based Redemption: In this type of MF redemption process, you can specify the number of units you want to sell

  • Amount-Based Redemption: In amount-based redemption, you need to specify the amount you want to withdraw from your mutual fund corpus

  • Complete Redemption: By choosing the ‘Redeem All’ option during the mutual fund redemption online process, you can redeem all the units held. 

When Should You Redeem Mutual Fund Investments?

Here are some of the factors that may lead you to decide to redeem your mutual fund investments:

  • Completion of Goal: Mutual fund investments should be goal-oriented, and once you achieve the target, it makes sense to withdraw the deposited amount along with the gains

  • Adjustments in Financial Goal: If you have made modifications to your financial strategies, you can redeem your existing mutual fund units and re-invest in another fund

  • Consistent Below-Par Performance: If a fund has fared poorly for far too long, it is advisable to consider the redemption of mutual fund units. This way, you can invest the money that you recover in a better-performing fund

Methods of Redemption of Mutual Funds Units

You can complete the redemption process through the following methods: 

  • Via Demat Account: You can complete your mutual fund redemption online through your Demat or trading account via the broker

  • Through AMC or Distributors: Another way to redeem your mutual funds is directly through an online platform of AMC or distributors

  • Registrar or Transfer Agencies: Registrar or Transfer Agencies (RTAs) maintain a record of your transactions and allows you to redeem your mutual funds

Mutual Fund Redemption Time

The settlement cycle of each category of the mutual fund varies and ranges between T+1 and T+2 working days.

 

These days include only business days and not weekends and other holidays. Moreover, the cut-off mutual fund redemption time to determine the NAV is 3 PM. It means that if you sell your mutual fund units before 3 PM on a business day, the unit will be sold at the current day’s NAV. 

Exit Loads Associated with the Redemption of Mutual Funds

Most fund houses expect you to invest in mutual funds for over a year. If you decide to redeem your mutual fund units before this time period, the exit load is charged depending on the type of mutual fund investment. 

 

While an exit load ranges between 1%-2% of the prevailing NAV, some mutual funds like the Equity-Linked Savings Scheme (ELSS) do not charge it. However, if you make an exit from the fund before the lock-in period of 3 years, these charges may apply. 

Taxation on Redemption of Mutual Funds

When you make redemption of mutual funds, your earnings are taxed based on the applicable tax regulations. 

1. Capital Gains

For equity-based funds, if you redeem your funds before 12 months, short-term capital gains (STCG) taxes are applicable at 15%. On investment duration over 12 months, long-term capital gains (LTCG) taxes at 10% are levied. However, LTCG tax is exempt on earnings of up to ₹1 Lakh.

 

On debt-securities, LTCG tax at 20% with indexation if redemption is made after 3 years. On the other hand, short-term capital gains are taxed as per the applicable tax rate on the individual.  

2. Other Taxation

The Ministry of Finance also levies securities transaction tax (STT) at 0.001%. However, this tax is applicable only to equity-based funds and not to debt funds.

 

Mutual funds are a basket of different company stocks from a common segment or industry. Hence, the net returns you can gain depend on how stocks perform under these categories or sectors. 

 

You may invest in funds that align with your financial objectives after considering essential factors, such as the fund performance, NAV, risk tolerance, expense ratio, etc.

FAQs on Redemption of Mutual Funds and How to Redeem Funds

How will I receive the MF redemption amount?

The AMC will send the MF redemption amount to the registered savings account.

How is the exit load charged?

The exit load is charged as a certain proportion of the Net Asset Value (NAV). For instance, if you withdraw ₹2,000 and the exit load is charged at 2% of the NAV, you will receive ₹2,000 - ₹40 = ₹1,960.

How is the redemption price determined?

The redemption price is determined based on the prevailing NAV at the time of redemption of mutual funds.

What is the 2FA process in the redemption of mutual funds?

Two-factor Authentication (2FA) is a two-step verification required for the purchase or selling of mutual fund units on the BSE MF StAR platform. 

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