Navigating market volatility: Strategising your mutual fund redemption

Mutual funds are an excellent investment opportunity but instances can arise where you must encash your mutual fund investments due to personal reasons or market conditions. The process of liquidating the mutual fund investment is known as mutual fund redemption. Before investing in a mutual fund, you must know all about its redemption process. 

In this article, we will look at what is mutual fund redemption, its types, reasons and the mutual fund redemption process. 

What is mutual fund redemption? 

Mutual fund redemption refers to the process of withdrawing the units from a mutual fund or whole fund. The mutual fund house buys the units from the mutual fund holder at the current Net Asset Value (NAV) of the unit. The mutual fund redemption time is mostly 3 to 4 days. 

Let us now look at the types of mutual fund redemption to understand the different possibilities: 

1. Unit-based redemption: In this type of mutual fund redemption, you can choose the number of units you wish to redeem. The final amount you will get will be based on the current Net Asset Value (NAV) of the fund units. 
2. Amount-based redemption: In this type, you do not have to worry about how to calculate tax on mutual fund redemption. Instead of specifying the units, you can specify the amount you want to redeem. The number of units will be automatically calculated based on the NAV and the amount you wish to redeem. 
3. Redeem all: Lastly, you can also redeem the entire investment from the mutual fund at once with the redeem all option. 

Reasons for mutual fund redemption

There are different reasons behind mutual fund redemption that can persuade the investor to redeem the fund. Some of the most common reasons include: 

1. Change in financial goal 

Financial goals are bound to change with time and age. While at a younger age, an investor might be willing to take risks, they look for stable and secure options with age. Other situations can also alter the financial goals of an individual. As a result, one of the most common reasons for mutual fund redemption is the change of financial goals. 

2. Consistent poor performance of the fund 

There can be a low fund performance for a short time sometimes due to the market conditions. However, if the low fund performance prevails., it might be better to invest the money in other funds. Compare your fund’s performance to similar funds to understand whether it is time to redeem your mutual fund investment. 

3. Better opportunity 

It frequently happens that new and even better opportunities come up for investment. This is another possibility where investors might choose to redeem their mutual fund units. However, evaluate the new investment opportunity thoroughly on grounds of risk involved, minimum investment amount, expected returns, liquidity, etc. 

4. Portfolio rebalancing 

A balanced portfolio is crucial for a healthy investment. Let us assume that in some time all the equity investments perform well increasing the share of equity in your portfolio. It must be time to redeem a few equity mutual fund units and invest them in fixed assets such as gold. As a result, portfolio rebalancing is a significant reason why several investors choose to redeem their mutual fund units. 

5. Emergency requirements 

Lastly, in case of emergencies, you might need funds urgently. This is another reason why mutual funds can be redeemed to meet emergency fund requirements. However, it is generally recommended to have a separate emergency fund so that your mutual fund investments are not affected. 

Understanding tax and exit loads on mutual fund redemption  

Taxes and exit loads are imposed on all mutual fund redemptions. For equity mutual funds with an investment tenure of less than a year, a short-term capital gain tax is applied. The tax rate for the same is set at 15%. 

In cases where the investment tenure is over a year, a long-term capital gain tax on mutual fund redemption at 10% is applied. The long-term tax applies only when the amount exceeds 1 lakh. 

For debt mutual funds, the taxation is dependent on the tax slab of the investor. The long-term gains exceeding 3 years are taxed at 20%. 

Most mutual funds usually require the investors to invest for at least a year before redemption. However, if you redeem your funds before a year is completed, mutual fund redemption charges might be imposed known as the exit load. The exit load is usually estimated as 1% of the total mutual fund investment amount.

Keep in mind that the minimum time for an equity mutual fund is a year while for a debt fund it could be relatively smaller. Consider the exit load and minimum investment period before investing in a mutual fund. 

How to redeem a mutual fund? 

There are 3 different methods of redeeming a mutual fund including the following: 

1. Through trading or demat account 

If the mutual funds were bought through a broker, they need to be sold via raising a request through a mutual fund redemption form with the same broker. In this case, the amount will be credited to the bank account linked with the demat account. 

2. Directly via distributors or AMC

In cases when the mutual fund was bought through either direct mutual funds or houses or distributors, there is an online platform to monitor the funds. In such cases, the mutual funds can be redeemed online through the platform directly. 

3. Registrar or Transfer Agencies (RTAs)

The RTAs maintain the record of mutual funds on behalf of mutual fund houses. The last option of mutual fund redemption is through the RTAs. 

Conclusion 

Mutual fund redemption is an easy process if you follow the right steps and keep in mind the exit load and tax implications. You can choose between the types of mutual fund redemption options based on your requirements. The mutual fund redemption days are usually 2-3 and the mutual fund redemption cut off time is 3:00 PM which can help you determine the applicable NAV. Read more on mutual funds on StockGro. 

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