Mutual Fund Redemption: How to Redeem, Types, Process & Tax Guide

What Is Mutual Fund Redemption?

Redemption of Mutual Funds is the procedure where mutual fund units are sold to the Asset Management Company (AMC) or through the online portal from where these units have been purchased. The redemption value of the units will be received by the investor in accordance with the NAV applicable at that time less the exit load/taxes. The amount credited depends on the number of units redeemed and the applicable NAV. 

How Does Mutual Fund Redemption Work?

Here is how mutual fund redemption works:

• The investor submits a redemption request through the AMC, registrar, or investment platform such as 5Paisa.
• The applicable NAV is determined according to the cut-off time and the mutual fund category.
• The redemption value is calculated based on the number of units redeemed and the applicable NAV.
• Any applicable exit load or taxes are adjusted.
• The redemption amount is credited to the investor's registered bank account within the applicable settlement period.

Example:
Suppose an investor holds 1,500 units of an equity mutual fund.

• Units redeemed = 1,500
• Applicable NAV = ₹42
• Redemption value = 1,500 × ₹42 = ₹63,000

If an exit load applies, it is deducted before the final amount is credited. Capital gains tax, if applicable, is calculated separately according to the prevailing tax rules.

Types of Mutual Fund Redemption

Investors can redeem mutual fund investments in different ways depending on their financial requirements.

Full Redemption

Full redemption means selling all the units held in a mutual fund scheme. Once the transaction is completed, the investor no longer holds any units in that scheme.

Suitable when:

• The financial goal has been achieved.
• The investor wants to exit the scheme completely.
• The investment strategy has changed.

Partial Redemption

Partial redemption allows investors to withdraw only a portion of their mutual fund units while continuing to remain invested in the scheme.

Suitable when:

• Only a part of the investment is required.
• Investors want to continue participating in future market growth.
• Partial withdrawals are needed for planned expenses.

Systematic Withdrawal Plan (SWP)

The purpose of Systematic Withdrawal Plan is that it helps the investor withdraw an equal amount of money or an equal number of units from the fund at regular intervals rather than withdrawing all at one go.

Suitable when:

• Investors require regular cash flow.
• Retirement or periodic income planning.
• Maintaining the remaining investment in the mutual fund.

How to Redeem Mutual Funds

Investors can redeem mutual funds through different methods depending on where the investment was made.

Method 1: Redeem Through the 5Paisa Platform

• Log in to your 5Paisa account.
• Navigate to the Mutual Funds section.
• Select the mutual fund scheme you want to redeem.
• Choose Full Redemption or Partial Redemption.
• Enter the number of units or redemption amount.
• Review the transaction details.
• Confirm the request using the applicable verification process.
• After successful submission, the redemption request is processed according to the applicable NAV and settlement timeline.

Method 2: Redeem Through the AMC Website

• Log in to your mutual fund account on the AMC website.
• Select the scheme.
• Choose the redemption option.
• Enter the redemption details.
• Confirm and submit the request.

Method 3: Redeem Through a Registrar or Distributor

Investors who purchased mutual funds through a registrar or distributor may submit their redemption request through the respective service provider using the prescribed process.

When Is the Right Time to Redeem Mutual Funds?

The right time to redeem mutual funds depends on an investor's financial goals rather than short-term market movements.

• The planned financial goal has been achieved.
• Funds are required for a planned expense.
• The mutual fund no longer matches the investment objective.
• Portfolio rebalancing is required.
• Changes in personal financial circumstances require liquidity.
• The scheme consistently underperforms its benchmark over a prolonged period after careful evaluation.

Factors to Consider Before Redeeming Mutual Funds

Before submitting a mutual fund redemption request, evaluate these factors to understand how the redemption may affect your investment and tax liability.

• Financial Objectives: If your investment matches your financial objective, for example, investing in higher education, buying a home, etc., you should redeem the investment, but do not withdraw just due to market fluctuation.
• Exit Load: Check whether the mutual fund charges an exit load for early redemption. Redeeming before the specified holding period may reduce the amount you receive. 
• Capital Gains Tax: Review the applicable capital gains tax based on the type of mutual fund and your holding period. Understanding the tax impact can help you estimate your post-tax redemption amount. 
• Lock-in Period: Certain schemes, such as Equity Linked Savings Schemes (ELSS), have a mandatory lock-in period. Units cannot be redeemed until the lock-in period for each investment is completed. 
• Market Conditions: Consider whether temporary market volatility is influencing your decision. Redeeming during a market decline may reduce the value of your investment compared to waiting for your planned investment horizon. 

Exit Load on Mutual Fund Redemption

Some mutual fund schemes charge an exit load when investors redeem their units before the specified holding period. The exit load is deducted from the redemption amount and is intended to discourage early withdrawals.

Example:

Suppose an investor redeems mutual fund units worth ₹1,00,000 and the scheme charges an exit load of 1%.

• Redemption value = ₹1,00,000
• Exit load = 1% of ₹1,00,000 = ₹1,000
• Amount before applicable taxes = ₹99,000

The applicable exit load depends on the mutual fund scheme and the holding period.
 

*The applicable holding period varies across schemes.
**Investors should refer to the Scheme Information Document (SID) for the applicable exit load. 

Tax on Mutual Fund Redemption

The tax payable on mutual fund redemption depends on the type of mutual fund and the applicable holding period.

Capital gains tax is calculated only on the profit earned from the investment and not on the entire redemption amount.

Mutual Fund Redemption Timeline and Settlement Period

After a redemption request is successfully submitted, the Asset Management Company (AMC) processes the transaction according to the applicable settlement timeline.

*The settlement period may vary depending on regulatory guidelines and the mutual fund scheme.

NAV Cut-Off Time

The applicable NAV depends on the time the redemption request is received and processed according to the prevailing SEBI guidelines. Requests submitted before the applicable cut-off time generally receive the applicable NAV as per the regulatory provisions for the respective mutual fund category.

Lock-in Period and ELSS Redemption Rules

Certain mutual fund schemes cannot be redeemed until the mandatory lock-in period is completed.

ELSS Mutual Funds

Equity Linked Savings Schemes (ELSS) have a mandatory lock-in period of three years from the date of each investment. During this period, investors cannot redeem their units.

For investments made through a Systematic Investment Plan (SIP), each instalment has its own three-year lock-in period. As a result, every SIP instalment becomes eligible for redemption separately after completing its individual lock-in period.

Apart from ELSS, other mutual fund schemes may also have restrictions based on their investment objectives or scheme conditions. Investors should review the scheme documents before planning a redemption.

Conclusion

Mutual fund redemption allows investors to recover their investment as per their financial goals. Before mutual fund redemption, there are certain things which should be known about NAV, exit loads, taxation, time, and lock-ins. This may help the investors in determining the redemption value and making right decisions regarding mutual funds.