Redemption of a mutual fund is an integral term that would be encountered at the time of investment in mutual funds. Redemption allows the investor to withdraw his capital along with the earning.
What is redemption of mutual funds?
The redemption process involves merely selling back the mutual fund units to the fund house against the market value at that time. Whether it is a short-term financing requirement or a need to rebalance a portfolio or for a profit mutual fund redemption, and how that is done something about which today’s investor is very curious to know.
This article discusses nature of redemption, reason behind it and procedure, which makes the investor suitably informed for the liquidation of units in the mutual fund.
Type of Mutual fund Redemption
Redemptions forms that a mutual fund unit can be redeemed in vary. This depends mainly on the specific financial requirement of an investor and the type of investment he or she wishes to have. The main ones are:
1. Partial Redemption
Partial redemption enables one to redeem only a part of the units one holds in a mutual fund. This will facilitate having partial liquidity, while retaining investment in the overall sense in the fund. It will appropriately serve those individuals who require liquidity but wish not to forego investment exposure to potential growth in the fund.
Example when a person buys 10,000 units in an equity fund and then liquidates 2,000 to meet unexpected cash requirements and remains with 8,000, which he could invest and would allow the proceeds to grow enough to earn some future appreciation.
2. Redeemable
Redemption of units at full value Redemption of units at full value is the selling of all the units in a mutual fund. The investor generally has no further desire to hold the investment or the entire amount is being used for a significant financial goal such as buying a house or education.
• Example: Redemption of all his units valued at ₹5,00,000 to fund the purchase of a property.
3. SWP, Short for Systematic Withdrawal Plan
This Systematic Withdrawal Plan or SWP enables a person to take out an assigned amount of a fixed number at regular time spans. It is employed by all persons who desire periodic income receipts and are available when one likes regular withdrawal of monies from their investments.
• Example: Investor opens a SWP for an amount of liquidation ₹ 10,000 monthly for creating a steady source of income through equity mutual funds.
4. Switch Redemption
This kind of redemption occurs because of the interchanging units of one mutual fund with another unit that leads to the earning on redemptions produced through the units exchanged. Thus, at this stage is when an investor restructures his portfolio to reduce risk or to accomplish newly transformed goals to generate more investments.
• Example: Transfer from equity fund to debt fund for lesser vulnerability towards market movements.
Why Invest or Redeem Mutual Fund
Mutual funds are the most common type of investments that people who invest in mutual funds may wish to sell their fund shares. Such decisions are generally based on the constantly changing financial requirement, market-related conditions, and changes in the investment strategy. Here are some of the basic ones:
1. Liquidity Needs
Liquidity requirement: Liquidations are based on a fairly wide reason – an urgent requirement of liquid cash to square up for the medical emergencies, home restoration or any other such pressing personal need.
• Example: Suppose an investor needs liquidation of ₹2,00,000 units to clear an urgent medical bill.
2. Re-balancing the portfolio
In case also, redemption of mutual fund units rebalances the portfolio. With time, certain assets in the portfolio will turn out to be considerably larger compared to the others. In such a case, the portfolio has become either too risk-averse or has ceased to be aligned with what an investor wants. Rebalancing refers to the redemption of units from those funds that have become too big as far as holding portions of the portfolio and repositioning funds in other investments.
• Example: Now an equity fund, which is doing quite well, could be brought to 50% of the portfolio. Investor could sell half the units and return it back to 30%
3. Issues related to Performance
Sometimes, an investor redeems the units on his dissatisfaction with the performance of a mutual fund. If the mutual fund performs worse than its benchmark or if expectations do not measure up, then such investment would make the investor redeem his units and invest in another promising investment.
• Example: If the equity mutual fund remains a non-performing instrument to the market for an appreciable amount of time, an investor will have to sell units and invest in some promising one.
4. Market Conditions
Even redemption decisions could get affected by market volatility. In a situation of very high volatility or recession, a mutual fund redemption would be there to redeem some units of it to reduce the risks involved with it. Especially in the case of equity funds, it would be seen due to the high influence of market conditions on such returns.
• For Example, during a stock market crash, he can sell units of his equity mutual fund investment and invest the proceeds in a debt fund or gold for safety.
5. Achieving Financial Objectives
There can be redemptive value even while saving for a financial goal. Suppose an investor is saving up for some purpose, say to make the down payment on a house or college fees to send his children to college, he can redeem the mutual fund units when he reaches that goal.
• Example: An investor who redeems his units from an equity fund to get ₹10,00,000 towards the purchase of a house.
6. Tax Efficiency
Redemption of mutual fund units may also be sought for tax efficiency. Investors would be able to harvest losses or manage their tax liabilities through the redemption of units. In India, there is LTCG and STCG on mutual funds. This may alter the timing and type of redemption too. The end.
• Examples: An investor in a mutual fund redeems a short-term debt fund, whereby the investment stayed for less than three years simply to avoid a tax on capital gains arising.
Redemption Steps of Mutual Fund
Redemptions of mutual funds are not rocket science but an operation that may not be stepped. Here, below is generally what happens, step by step, in mutual fund redemption:
1. login to the trading platform
For instance, an investor logs in from a portal where the units of the mutual fund have been acquired. The portal could be the website of a house of funds or an online trading portal.
2. Choose the Fund
After logging in into the platform, an investor selects the mutual fund from which units are to be redeemed. Normally, the platform offers a list of all the mutual funds subscribed by an investor.
3. Redemption Amount
The redemption amount, whether in form of a lump sum of cash or the specific number of units, is what the investor designates. Depending on the investment cash flow needs, this will vary with the specified portfolio strategy.
4. Mode of Redemptions
Select redemption type: the investor has three options, such as partial redemption, full redemption, or SWP. Alternatively, one may switch funds-that is, one redeems the units from a given fund, and the face value is transferred to another instantaneously.
5. Redemptive application
The investor will make the redemption request. The redemption applications can be filled on the Internet or on a paper form basis depending on whether one wants an internet-based system on the preferred portal.
6. Redemption Request Processing
As soon as a redemption request is placed, the mutual fund house processes the same. If redemption requests are placed before cut off time-usually 3:00 PM, then those redemption requests get processed on that day itself and those submitted after cut off time get processed on the next business day.
7. Payment Receipt
Once the redemption request has been processed, the mutual fund house transfers the redemption proceeds into the investor’s bank account. In case of regular redemptions, it takes about 2-3 business days, but SWP payments are paid periodically as instructed by the investor.
8. Tax Implications
Tax Liabilities on Redemption
The holding period is taken as a basis of capital gains tax from the investors. LTCG generated from equity funds is taxed at 10%, while STCG at 15%. Taxation from debt funds changes with the duration.
Conclusion
Redemption of mutual fund: Actually, that is a part of the investment management which gives a kind of liquidity and flexibility to the investor.
Such a thing one needs to know quite surely that the investor makes an informed decision are redemption types and reasons for redemption, with the process followed.
Mutual fund redemption is an important ingredient in a well-managed investment strategy, be it to meet urgent cash needs, rebalance a portfolio, or optimize tax liabilities.
But those redemptions have to be done in proper evaluation of the market, tax considerations, and long-term planning such that it becomes an outcome rather than a choice resulting from a whim of thought.
FREQUENTLY ASKED QUESTIONS
1. What is the new rule for mutual fund redemption?
All redemptions which occur before the cutoff time of that day when 3:00 PM in calculation is at day’s NAV or Net Asset Value. Requests received after the cut-off time are processed at the next business day’s NAV. Another regulatory compliance is with the SEBI regulations in regard to the credit redemption proceeds. The houses must credit redemption proceeds to the investor within 3 working days.
2. What is the 7-day redemption requirement?
The minimum processing period for a redemption application under the SEBI guidelines is the 7-day redemption requirement. It mandates mutual funds to settle redemption proceeds within 7 working days. Except that if the redemption amount is too high or for the case of illiquid assets, most mutual funds pay it back within 2-3 working days
3. How long does it take for mutual funds to redeem?
A thumb rule would be redemption of mutual funds usually takes around 2 to 3 working days for the same to get processed and get credited to the account of an investor post redemption request made. Though for certain schemes in mutual fund processing can go up to 7 working days.
4.How to withdraw money from a mutual fund?
The following are the steps that can be followed: Login to investment platform or web site of the mutual fund house. Choose the mutual fund you wish to withdraw. Specify number of units, or units plus amount for withdrawing or remittance request.
Request made till cutoff otherwise it can be reflected in NAV next day. On allotment, these amount will get credited to the linked banking account.
5. Can I withdraw a mutual fund anytime?
Yes. One can withdraw or redeem mutual fund units anytime as per the rules of the fund. Equities can be drawn anytime, and debt or some hybrid funds could have lock-ins or exit load if redeemed prior to a time stipulated on redemption. Even the amount redeemable will rely on the NAV of the mutual fund because, surely, that changes based on market value of the fund’s assets.