WHAT IS MUTUAL FUND REDEMPTION?

When an investor decides to sell his units from the fund, it is referred to as mutual fund redemption. During this process, investors may be charged with an exit load. On the redemption, the investor receives capital gains that are taxable. This taxation depends primarily on the holding period and the fund type. The investor should keep certain things in mind while going through this process. In this article, we will be talking about these aspects in detail. 

WHEN TO REDEEM YOUR MUTUAL FUND?

These are the situations that can be considered ideal for redeeming your mutual fund units. 
1. Change in Investment Strategy:

If the AMC changes the investment objective of the fund or alters the market cap orientation, then you should look forward to redeeming as this might not align with your goals. 
Let’s take an example for better understanding, if you have invested in Flexi cap funds and the managers changed the orientation to large-cap funds only. This can significantly impact your returns and risk and might not compliment your investment goals. So you might want to opt out and redeem. 

2. Change in Fund Manager:

Fund managers are the mind and knowledge behind the fund. Investors often opt for funds on the basis of the experience and skills of these managers and they represent a particular investment philosophy. Change in managers will indicate that the existing strategy or philosophy will not be followed now and the new changes might not go hand in hand with your objectives. 

However, it is always important to consider & understand the philosophy & investment style of the new manager before making any redemption decision purely based on that fact.

3. Negative returns:

It is fully possible that the fund you opted for is either underperforming or giving negative returns. In this situation, you will be concerned as the fund is not at par with what you have thought. So you might opt to migrate your money in some better funds by redeeming the same. 

4. When you are nearing your goals:

The primary objective of investing in mutual funds is to achieve your short or long-term goals. Once you see that you are nearing your goals or have already reached or surpass them, you will look forward to redeeming them. 

Broadly there are 5 ways through which you can conveniently redeem your mutual funds. Let us discuss each one of them in detail. 

1. Redemption through Trading & Demat Account:

Most of the investors in today’s time have switched to online trading & Demat accounts which have made the process very easy and simple. If you have purchased the mutual fund’s units through a Demat, then the redemption will also take place through it. As the process is completely online, electronic payment of NAV redeemed mutual fund units are credited directly into your source account. 

2. Redemption through CAMS:

Computer Age Management Services (CAMS) assist the investors in the redemption process of various AMCs through their office. A duly filled form can be sent to the CAMs office and after the request, the sum is paid to the investor’s source account within 3-5 working days.

3. Through the AMC/Fund House:

If you have bought your mutual fund units directly through an AMC, you can directly login on their portal and proceed with partial or full redemption of your units. The account gets automatically closed if you redeem all the units, but in case of partial redemption, the balance units will continue to perform. Apart from this, there also exists an offline procedure in which you have to visit the nearest branch and submit the needful application and forms. The redeemed amount is credits to your source bank account through NEFT or you are given a cheque. 

4. Through an Agent:

You can always reach out to your mutual fund agent/advisor who will help in placing a redemption request for you. Also, you may place a redemption request directly through your agent’s investment platform. Making redemptions from ZFunds App is very quick and easy involving a few-step process.

THINGS TO CONSIDER BEFORE MUTUAL FUND REDEMPTION

1. Fund Types

Before proceeding with the process, you should have a look at the fund types. Whether it has any lock-in period, or closed-ended fund, or fixed maturity plan among others. Redemption in between the tenure for every mutual fund may not be possible as you may need to remain invested. 

2. Market Volatility and conditions:

Volatility and market conditions should be also taken into account as it allows you to buy quality funds at attractive valuations. Decline and dips in the market help you in long-term wealth creation, as it allows you to add additional units to your fund.

3. Exit Load:

As discussed earlier, there may be a situation where an exit load will be levied on your funds if the redemption is made within the specified period. You won’t need to pay anything as this will be deducted from the assets only. This is not a statutory charge, it can rather be called a charge imposed by a fund house to discourage investors from redeeming their investments. 

Also Read: Exit Load in Mutual Funds: Meaning, Types, Calculation, Example

4. Tax Implications:

You should always check the tax implications arising out of the gains from the investments. (if any) before the option to redeem any fund. Both equity and debt mutual funds have separate tax implications which have to be paid by the investors while filling the income tax returns. 

FAQs

1. What is a mutual fund redemption?

When an investor decides to sell his/her units from the fund, it is referred to as mutual fund redemption.

2. What are the ways to redeem mutual funds?

The ways available to redeem mutual funds are through Agents, AMC, Third-Party  Portals, CAMS, or a Demat Account. 

3. What are the things investors should keep in mind before redeeming?

Some things to keep in mind before redeeming the mutual funds are fund type, market volatility, tax implications, or exit load associated with the fund. 

4. What are the ideal scenarios to redeem mutual funds?

The ideal scenarios to redeem mutual funds can be the completion of goals, under-performance, change in investment strategy, or fund managers of the scheme.

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