All About Mutual Fund Redemption


As an investor, you might have struggled with the temptation of encashing the fund units of a poorly performing fund and diverting your money elsewhere. The fact that you are reading this piece, tell us that you may be ready to give in to this urge, but should you? If you must, then under what circumstances? What does withdrawing money from a fund entail? Read on to know everything about Mutual Fund redemptions.

When to exit and redeem a fund

Just because your fund gave you low returns a couple of times, it does not warrant a hasty step like redemption. A common mistake is that people panic when the stock market falls and decide to sell their fund units quickly. However ,selling because the market is going down ,will make you lose the opportunity to buy more units at lower prices, and since you don’t know when the market swings up again, you will end up being out of market when that happens. Remember, mutual funds reap returns in the long run and hence selling your fund based on market lows is a useless strategy
However, the ultimate aim of investing in a mutual fund is to reach your financial goals successfully, and in order to achieve so, there may be certain cases wherein exiting your fund could be deemed necessary. Let us see some situations where you may consider redeeming your units.

1. You have achieved your financial goals

You might have invested in a long term goal (10 -15 years) for your child’s education, child’s wedding or buying a property or a short term goal like travel, buying a car or a gadget. If you have achieved your goal and now want to use the money for the same, you should withdraw from your investments irrespective of what the market conditions are.

2. Consistent fund underperformance

Now “underperformance” holds a different meaning for different investors. As discussed earlier if your holdings give you an unsatisfactory return for a period of less than a year, liquidating your fund might not be right. However, if the fund is consistently giving poor returns for a period of more than 2-3 years, it may be time to re-invest your money to a better performing fund. Don’t forget to compare this fund’s performance with other similar funds or to a suitable benchmark before making the switch.

P.S. At Goalwise we use a data driven strategy to select and review Mutual Funds automatically every year. Any fund that underperforms gets replaced with a better performing fund and all investors can update their ongoing SIPs and existing investments to the latest selection of funds with just a few clicks.

3.Change in fund objective or strategy

The fund manager is the custodian of your money and is responsible for driving the fund to its goal with his expertise and experience. However, if there is a new fund manager, it may be time to sit up straight and take notice. If your fund’s goal remains unchanged and the returns are good over the next year, then it shouldn’t be a cause of worry.

You invest in a certain fund to reach a certain financial objective, and if your existing or new fund manager suddenly changes the strategy and starts investing in avenues that are not congruent with the fund’s initial mandate, then it’s time to re-evaluate the fund . For instance, if your large cap fund starts investing in medium or small cap stocks either stealthily or by explicitly changing its category to a multi-cap or mid-cap fund then this is going to have an adverse impact on the risk-return profile of your portfolio.. You would, however, be notified of such a change by the fund if it happens and can take a call accordingly.

P.S. At Goalwise, we proactively monitor all your investments for any such changes and notify you if any action needs to be taken so that you can spend your time doing other more interesting things.

4.Financial emergency.

Selling one’s long term investments because of an unforeseen financial emergency is a common occurrence. Emergencies come unannounced hence the best time to prepare for them is before they happen. Investing in an emergency fund along with investing for your long term goals is a good way to build up some financial cushion.. If you don’t have an emergency fund, we suggest you immediately build one of an amount approximately equal to 4-6 months of your living expenses, so that any such unforeseen situation does not interfere with your long term goals.

P.S. At Goalwise you can create and invest in an emergency fund and cushion yourself against financial stress. Certain funds offer you to instantly redeem upto Rs 50,000 or 90% of the invested amount and the money will be credited in 30 minutes - even on weekends and holidays.

How to withdraw money from mutual funds

Once you have decided to redeem your funds, you can do so by the following methods.

1. Directly via AMC or distributors

In case you have purchased a mutual fund directly from the Mutual Fund company (AMC) or a distributor platform, then you can sell it off on the online portal itself. You can decide whether you want to sell all the units or some. The online method is pretty fast and money gets credited in your registered bank account in 3-5 business days. There is an offline route as well that requires you to visit the AMC office. Post-processing your request, the AMC will send you the redemption amount either through NEFT or send a cheque to your registered address.

P.S. If you have invested in mutual funds through Goalwise, redeeming your funds is just a click away. Watch this video to see how easy it is.

2. Through a trading or demat account

If you have bought Mutual Fund units in your demat account via a stock broker then you need to place a sell request via the same broker. After the redemption is processed you will be made an electronic payment via NEFT or IMPS against your redemption request. The amount will be credited in the bank account registered with the Demat account.

3. Through Registrar and Transfer Agency (RTAs)

RTAs like CAMS and Karvy accept transactions on behalf of AMCs that they service. Any given Mutual Fund company (AMC) is typically serviced by either one of CAMS or KARVY (exceptions being Franklin Templeton AMC and Sundaram AMC which are their own RTAs respectively). All you have to do is download a redemption form, fill it with the details of the fund(s) you want to redeem from and the respective units and amount, and submit the duly signed form at the nearest CAMS/Karvy office. You can also use CAMS or KARVY apps to do the same online.

How does a Mutual Fund redemption work?

Mutual Fund redemption works differently than selling a stock. When you sell a stock, you need to find a buyer for it and the sale will happen at a mutually agreed price (typically executed via a stock exchange). When we redeem Mutual Fund units, there is no buyer on the other side and there is no price negotiation. In a sense, the Mutual Fund itself buys back your units at the NAV of the day of the transaction. If the day is a holiday then the next day’s NAV (and not the previous day’s) will be used for the transaction.

There are three different redemption options while withdrawing your money from Mutual Funds:
1. Amount based redemption: You can specify how much amount you want to withdraw from your fund. In this case the applicable NAV will be used to determine how many units of that Mutual Fund will be sold in order to redeem that amount. This calculation will be done by the Mutual Fund itself.

2. Unit based redemption: You can specify how many units you want to redeem from your fund. Here you won’t know exactly how much amount you will get on redemption of those units as that will be determined by the upcoming NAV (amount = units * NAV). This option is useful when you want to withdraw just those units that are exit load free or lock-in free (in case of ELSS funds).

3. Redeem All: This will simply redeem your entire investment in that fund.

Taxes & Exit Loads

You should know that each redemption is treated as a withdrawal from the fund and is subject to tax based on the category to which the fund belongs and the investment tenure. This tenure can be short term or long term. In case of equity funds, gains on investment for less than a year are called short term capital gains and attract a tax of 15 % (on the gains). If you have invested in equity for more than a year and then redeem the units, the gains will be called Long term capital gains and will be taxed at 10% (if above 1 Lakh) . For Debt funds, if the investment is for 3 years or less , gains would be considered short term. The gains will be taxed as per your income tax slab rate. Long term gains will be considered in case of an investment of more than 3 years and a tax of 20% on gains (after indexation*) will be levied.
*After indexation means after subtracting inflation from your overall returns.

Apart from taxes, exit load, a penalty for withdrawing your investments too soon, might also be applicable. Not all funds penalise you for making a quick exit , this is a feature observed commonly in equity funds. The definition of “too soon“ is generally 1 year for equity but differs for debt funds. For equity funds the fee is generally 1% of the total amount withdrawn (within a year of investing ). Generally units held for more than 1 year don’t attract an exit load however there are exceptions. In case of debt funds, liquid funds and short term debt funds usually don’t have any exit load. However dynamic bond funds, long duration debt funds and other types of debt funds might charge some exit load if you withdraw between 6 months to a year. Be careful to check these before redeeming your funds.

P.S. If you are using Goalwise, while redeeming your funds Goalwise does all these calculations by looking at your entire transaction history, applies the relevant time frame calculations and provides advanced options to withdraw only the exit load free amount or only the amount under long term capital gains so that your tax and load outgo is minimised.

You should also know..

The turn around time to receive the redemption proceeds vary from instant redemption up to Rs 50,000 in the case of some liquid funds, to up to 5 business days in general. Generally open-ended schemes can be redeemed anytime with the exception of schemes with a lock-in period like ELSS, which cannot be redeemed up to 3 years from the date of investment.

Finally, always stay true to your financial plan, do not act impulsively and redeem your funds for the wrong reasons. Arm yourself with knowledge, weigh the pros and cons judiciously and take a logical approach. In case you feel unsure, consult with a financial advisor and act accordingly.