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How to Redeem Mutual Fund Units

Over the years, investing in mutual funds has become a preferred option for investors to grow wealth, as it offers higher return potential with a great degree of flexibility. Unlike, traditional saving plans, which comes with a fixed maturity date, investing in mutual funds is not time-bound, and offer investors with easy entry/exit options.

As mutual funds don't have a fixed investment period, investors have to decide on their own, when to exit the investment. This withdrawal process is called redemption.

In this article, let us focus on understanding mutual fund redemption and how to do it and when.

Methods of Mutual Fund Redemption

Mutual Fund redemption is a process through which an investor liquidates or sells his/her investments in a particular fund. The investor has the option to sell his/her investment in full or by part. Basically, all the redemptions are done due to four different reasons.

  • If the investment objective is fully met and you want to liquidate it.
  • If there is a large deviation in the performance of the fund, it is likely to affect the investment objective.
  • Migrate to another fund type with higher return potential or low volatility.
  • In case of a financial emergency, you decide to liquidate your mutual fund investments for funds.

The redemption requests are executed at the fund's Net Asset Value (NAV) of the day, if received before 3 p.m. of the same business day, else NAV of the next business day is taken. It takes 3-4 business days for the amount to get credited in the bank account of the investor.

As an investor, you have multiple methods to choose from through which he/she can redeem their mutual fund units. You can use any of the redemption method listed below.

Offline Redemption

There are two different ways under offline redemption method.

  • Through an Agent or a Distributor :

If you have purchased your mutual fund investment from a registered agent or a distributor, then you can sell your mutual fund units through the same person or entity. You need to fill the redemption form, supplied with the account statement with the number of units you want to sell or the amount you wish to receive. After processing the redemption request, the amount is credited to your bank account through NEFT or a cheque is sent to your address.

  • Through the registrar or by transfer agents :

Every mutual fund house uses centralised services of transfer agents, like CAMS or Karvy Computershare, which maintains the detailed record of transactions of investors on behalf of mutual fund houses.

You can sell your mutual fund units by submitting the redemption form to the concerned registrar of your mutual fund house.

Direct Redemption

You can also place your redemption request directly with the asset management company, on their online portal. You also have the option to submit the redemption form by visiting their branch office.

In case, you have purchased a Direct Plan of the mutual fund, this is your only option for redeeming all your units. You have to log in to their portal for placing the request as you did while buying it.

For investors with Regular Plan, they would have to submit the redemption form by visiting their office physically or through the online mode.

Online Redemption

  • Through a Demat account or trading account :

If you have purchased your mutual funds through a Demat account, then you have to place your redemption request in a similar fashion, as you have done while buying it.

As the redemption request will be processed by the broker, the redemption amount will be credited to the bank account, which is registered with the Demat account.

  • Online portals :

The advent of many FinTech portals has allowed investors to buy all their investing needs like mutual funds and insurances from a single platform.

These online portals allow you to sell your mutual fund investments in the same way you purchased the units. On confirmation of the receipt of the redemption request, it is processed as per other methods of redemption, and the amount is directly credited to your bank account.

Things to Consider Before Redemption

Investments in mutual funds, other assets, or securities are done as per investment objective, after a lot of research and effort. So, it is important that redemption should not be based on a few facts or short term performance of the fund, as it will jeopardize your whole investment journey. Here is a list of things to consider before redemption.

Market Volatility

Volatility in the market should be the least concern for you because it allows you to buy quality funds at attractive valuations. Dips in the market helps you in long term value creation, as it allows you to pick additional units in your fund.

However, many good fund managers are able to lower the impact of volatility in the fund through the right mix of different securities. Selling the fund during the bearish market period could significantly lower your returns and effectively erode your capital.

If the fund is under-performing, even in the bullish phase of the market for a long time, then you can consider redeeming your mutual fund units.

Fund Type

Before redeeming, you should check your fund type, whether it is an ELSS fund, which has three years lock-in period, a close-ended fund, or fixed maturity plan. Redemption mid-way is not possible for every mutual fund category, and you need to remain invested for the full term or maturity. Even if you are invested in an ELSS fund through SIP, each SIP installment will have a three-year lock-in period, only after which you will able to redeem your ELSS units.

Tax Implication

Before opting to redeem, you should check the tax implications arising out of gains (if any) from the investment. Both equity and debt mutual funds have different tax structure, which has to be paid by the investor at the time of filing income tax returns.

Gains arising out from equity fund for a period less than one year are taxed at the rate of 15 %, plus surcharge and applicable cess. Whereas, gains from equity fund held for more than one year is classified as long term capital gains, which is tax-free for investors upto a certain limit.

Gains arising from debt funds held for less than three years are classified as short term capital gains and is taxed as per the income tax slab of the investor. For gains arising out from 36 months and more of investing in debt funds, is taxed at the rate of 20 % after indexation.

Exit Load

As discussed earlier, open-ended funds don't have a fixed timeline or maturity period for investing. But there are costs imposed, if the funds are withdrawn within the specified time limit. Generally, fund houses charge an exit load of one per cent on investments if redeemed within one year.

Exit load is not a statutory charge, but it’s a charge imposed by fund houses to discourage investors from redeeming their investments within one year.

When to Redeem a Fund

Ideally, there are four situations when you should consider redeeming your investments in mutual funds.

When You Are near Your Investment Goal

It is the perfect scenario to sell or redeem your mutual fund units. If the said investment has neared the investment goal, then he/she should sell the fund, irrespective of the market condition.

Negative Change in Fund Performance

Not every investment decision goes as per plan; sometimes the market gets you on the wrong side and sometimes, you get the fund wrong. If your mutual fund investment is not performing as per your plan, then you should immediately redeem your units and migrate to another fund that matches your investment objective and meets your return expectation.

When There Is a Change in Fund Manager

Funds that perform well in the market are not because of the favorable market conditions of the selected asset class, but it is due to the fund managers. Every fund manager has his/her own distinct investment philosophy, through which they bring success to a fund.

A change in the fund manager reflects the departure of that distinct investment philosophy and could see a change in investment objective of that fund.

If there is a significant deviation in the performance of the fund, because of that event, then you should redeem your mutual fund units.

Change in Investment Strategy

If the mutual fund house changes the investment objective of the fund and market-cap orientation, then you should redeem your investments in the fund.

For instance, if you have invested in a large-cap fund, and the fund changes its market-cap orientation to a mix of both large-cap and mid-cap stocks, then the additional exposure to risk from mid-cap stocks can have a severe impact on the performance and return of the fund.

How to Redeem Mutual Funds

As discussed, investors can use both online and offline methods for redeeming their mutual fund units. If the mutual fund is bought through offline modes, then he/she needs to submit the duly signed redemption form filling all details like Folio no., scheme name, units to be sold to the distributor or agent.

The redemption form can also be submitted directly to the branch office of the concerned transfer agent, or by visiting AMC office. For redemption through online mode, log in to the online portal from where you have purchased the mutual fund and place the redemption request.

Following the processing of redemption, the amount will be credited within 2 to 4 business days in the bank account of the investors through NEFT.

FAQs on How to Redeem Mutual Fund Units

Can I redeem mutual fund anytime?

Yes, you can redeem open-ended mutual funds anytime at the prevailing net asset value (NAV) of the fund. But, if you are invested in a close-ended fund or fixed maturity plan (FMP), then you have to wait until maturity or expiry of the term.

How do I redeem my Zerodha mutual fund?

To redeem your mutual funds in Zerodha account, first, log in to Coin and then check the Portfolio header, where it will display the funds you have invested in. Select the fund, you want to redeem, and then click the Redeem button. Specify the number of units you want to offload/sell and click on the redeem button to place your request. After the settlement, the money from redemption will be transferred to the Trading account, from where you can transfer it to the bank account.

What does redemption mean in mutual funds?

Redemption in mutual funds means selling of units of a mutual fund scheme in part or full.

What is the right time to redeem mutual funds?

There is no particular time in a year to redeem mutual funds. Mutual funds should be redeemed in one of the following cases.

  • When you have reached or are close to the investment goal.
  • When the fund is not performing well or is against the general trend.
  • When there is a significant change in the fundamentals of the funds, like change in investment objective, or the fund manager.

Can we withdraw money from the mutual fund any time?

Yes, you can withdraw money by redeeming your open-ended mutual funds, any time of the year. In close-ended mutual funds and fixed maturity plans, you can withdraw after the maturity or end of the term.

Can I withdraw SIP anytime?

Yes, you can withdraw from your SIP investments in open-ended funds at any time of the year, except in ELSS funds, which has a lock-in period of three years. Each SIP instalment of the ELSS funds is also locked-in for three years, from the date of investment.

How do I redeem my ELSS mutual funds?

ELSS Funds can be redeemed after the lock-in period of three years. The redemption of ELSS Funds is similar to that of any open-ended mutual funds.

How much time does it take to redeem SIP?

The time taken to redeem both SIP investment and lump sum investment is the same and usually takes three to five working days to process and receive the funds in your registered bank account.