How to Process Online Mutual Fund Redemption—Steps, Tips, and Important Considerations

Mutual fund redemption offers investors a valuable opportunity to unlock their returns and access liquidity when needed.

Whether one is looking to reallocate their portfolio, meet a financial goal, or simply cash out, redemption provides a straightforward mechanism for converting investments into cash. It allows for flexibility in managing financial needs while also offering the potential to capitalize on market gains.

This article will explore the process of mutual fund redemption, highlight its benefits, and provide practical tips for making informed and strategic decisions when redeeming mutual fund investments.

What is Mutual Fund Redemption?

Mutual fund redemption is the selling of units in a mutual fund back to the Asset Management Company of the fund. When redeemed, investors receive the value of the units based on the Net Asset Value (NAV) of the fund on the date of the transaction.

Here are some key characteristics of the mutual fund redemption process that one must know:

1. Mutual fund redemption enables investors to withdraw their investment at prevailing NAV, wholly or partially.
2. If the redemption request is made prior to 3.00 PM on a trading day, same-day NAV is applied. Requests thereafter are applied using the next trading day NAV.
3. One must understand taxes, exit loads, and redemption time slots, which range from one to four working days.

Let’s learn how to redeem mutual funds, both online and offline in India.

Example – 

Let us assume Mr. Amit Kumar has an annual income of ₹12,00,000. This means he falls under the 30% income tax slab.

He has invested in equity mutual funds and initiated the investment on January 1, 2023, purchasing funds for ₹2,00,000, about 1,000 units. The NAV at purchase was ₹200 per unit

Now, he redeemed his investment on March 1, 2024, which is about 14 months after purchase.

• Redemption NAV: ₹250 per unit
• Redemption Value: ₹2,50,000 (1,000 units × ₹250 per unit)

Tax Calculation 

• Redemption Value: ₹2,50,000
• Purchase Value: ₹2,00,000
• Total Gain (LTCG): ₹50,000

Exemption: Under the new Budget 2024-25 rules, LTCG on equity mutual funds is exempt up to ₹1,25,000. Since the gain of ₹50,000 is below the exemption limit, no tax is payable.

Different Types of Online Mutual Fund Redemption

An investor may redeem:

• Partially: Specifying the number of units or amount to withdraw
• Completely: Redeeming all units, effectively closing their position in the scheme

Exit Loads Relating to Mutual Fund Redemption

A mutual fund firm charges an exit load on the redemption of units by the investor within a particular period from the date of investment. This penalty prevents too many redemptions and encourages the investor to invest for a long time.

Such exit load amounts reduce the total funds that the investor shall receive, but they are applied to ensure stability in the fund.

Important Points Regarding Exit Loads

• Percentage of NAV

The exit load will generally be a small percentage (around 1%) of the NAV of the units being redeemed.

• Not Applicable to All Funds

Some funds, like liquid funds, may have zero exit load, making them more suitable for short-term needs.

• Encourages Long-Term Investments

Exit loads prevent frequent volatility in the fund through redemptions.

• Exit Load-Holding Periods for Various Types of Funds

For equity funds, the minimum holding period is normally one year to prevent exit loads.

For debt funds, holding periods may vary. For ultra-short-term or liquid debt funds, the exit load period is generally much shorter.

How to Redeem Mutual Funds?

Mutual fund redemptions can be done in simple steps, and investors have both online and offline options.

Online Mutual Fund Redemption Process

1. Through the AMC Website or Platform

Step 1: Log in using the folio number or PAN.

Step 2: Select the scheme.

Step 3: Specify the number of units or amounts to be redeemed.

Step 4: Confirm the redemption request.

2. Through Trading or Demat Account

If mutual funds are accounted in a trading or demat account, investors can redeem them just like selling shares through the platform of the broker.

3. Through Registrars such as CAMS and Karvy

Step 1: Use their online portals to log in,.

Step 2: Select the scheme.

Step 3: Place a redemption request.

4. Third-Party Platforms

If investors have used other apps or third-party portals, they can redeem directly through those platforms.

Offline Mutual Fund Redemption Process

1. Through AMC or Registrar’s Office

Step 1: Investors must fill in details in a redemption request form. These details are:

• Name of the investor
• Name of the scheme
• Folio number
• Number of units to be redeemed

Step 2: Sign and submit the form to the AMC office or an authorised registrar and wait for the funds to be credited to the account.

2. Through Banks or Distributors

Investors simply need to submit a transaction slip at the bank or through the agent.

3. Points of Acceptance

Mutual fund redemption can be processed through PoAs. For that, investors have to submit the redemption form to an official place for transaction acceptance.

When Should Investors Redeem Their Mutual Fund Units?

Redemption of mutual fund units is a decision that needs to be taken after serious thought, rather than mere reactions to market fluctuations.

Here are some instances when investors can redeem their mutual fund investments:

1. Persistent Underperformance

Volatile short-term movement in the market is normal and must not be considered a reason for redemption. However, the fund’s persistent underperformance presents a valid reason to reassess the investment.

When a fund delivers a negative return (Alpha α) over time, it underperforms its benchmark. Alpha (α) is the difference between the fund’s return and the benchmark’s return.

For example: Suppose the SENSEX grows from ₹36,000 to ₹39,000, delivering an 8.3% return. However, the mutual fund in which one has invested only provides a 6% return. This means it underperforms with an alpha of -2.3%.

Consistent underperformance means that the mutual fund investment fails to meet its required potential, and perhaps investors need to find better-performing funds that coincide with their financial goals.

2. Financial Emergency

When faced with an unexpected medical bill or unforeseen losses one may necessitate immediate withdrawal of the funds.

If an investment is made in liquid funds for emergencies, investors can take advantage of the fund’s instant redemption feature. For these reasons, liquid mutual funds are best suited for urgent financial requirements.

3. Changes in Fund Strategy

Mutual fund houses constantly modify their strategies to adapt to prevailing market conditions or improve their performance. Still, drastic changes can harm long-term investment goals.

Examples of Strategy Changes:

• A change in its stock-picking emphasis, such as switching from large-cap to mid-cap equities
• Modifications in sectoral focus or broader fund objectives
• Hiring a new fund manager with a different management approach

If these changes don’t complement an investor’s goals, perhaps it’s time to redeem the units and rebalance them into a more appropriate fund.

4. Meeting Investment Objectives

The main objective of any investment is to achieve financial milestones, buy a house, fund education, or plan retirement. Investors can redeem units for the intended purpose if they have obtained their preferred returns or at the end of the investment horizon.

A Word of Caution

Mutual funds draw their performance from a portfolio of stocks or bonds. Some assets may outperform; others might lag, creating periods of sub-optimal returns.

• Short-Term Market Fluctuations

Investors should refrain from panicking over short-term market movements. Fund managers are professionals trained to rebalance portfolios to optimise performance.

• Assess Long-term Trends

One should redeem only after persistent long-term underperformance and not over temporary downturns.

• Opportunity Loss

Responding to market swings or leaving investments too early can result in lost opportunities for returns. Continuity in investments enables one to take advantage of rupee-cost averaging and compounding.

Investors can buy extra units as the price drops during the fall. Eventually, reduced costs work in their favour because of compounding.

• Market Volatility Forces Exit

Selling during the first big market fall often means missing the recovery phase. Markets are cyclical; patience can yield significant rewards.

• Assess Tax Liabilities

It is important to learn about short-term and long-term tax liabilities related to mutual funds. It can help optimise the online mutual fund redemption strategy.

Conclusion

The mutual fund redemption process is a critical part of investment management. Every investor should be aware of it, as it is a favourable way to acquire capital to meet any financial emergencies.

However, the decision to redeem should be made carefully, considering best practices, the right time for redemption, and the short-term and long-term objectives.

If one is still not sure of the timings or reasons for redemption, then one should consult with experts and get a personalised recommendation based on financial goals, risk appetite, and current market conditions!

Disclaimer: PowerUp is not responsible for any errors, omissions, or outcomes related to the use of this information.