Mutual Funds
by 5paisa Research Team Last Updated: 2023-07-04T12:50:32+05:30

Mutual fund redemption is a critical aspect of an investor's journey, as it involves the process of selling fund units to realise returns. This article delves into the nuances of mutual fund redemption, discussing the right time to exit, the various methods for redeeming units, and the factors to consider before making the decision. By understanding these concepts, investors can effectively navigate the redemption process and make informed choices to maximise their financial gains.

What is Mutual Fund Redemption?

Mutual fund redemption is the process through which an investor sells their units in a mutual fund scheme to realise returns on their investment. This process involves withdrawing units held in the fund, to cash in on the gains or cut losses, depending on the fund's performance and the investor's financial goals.

The decision to redeem mutual fund units can be influenced by various factors such as achieving a specific financial goal, the fund's consistent underperformance, or changes in the investor's risk appetite. When redeeming units, it is crucial to consider the tax implications, exit loads, and other charges that might apply, as these can affect the net proceeds received by the investor.

Mutual fund redemption units can be carried out through different methods, including directly through the asset management company (AMC), via a trading or Demat account, or offline through an agent or distributor. The redemption amount is typically credited to the investor's registered bank account within a few working days, depending on the type of fund and the method used for redemption.

When to exit and redeem a fund

Exiting and redeeming a mutual fund should be based on the investor's financial goals and the performance of the fund. Some key reasons to consider mutual fund redemption are:

●    Achievement of financial goals: If the investment has grown sufficiently to meet a specific financial objective, it might be the right time to redeem the units. 
●    Consistent underperformance: If the fund consistently underperforms its benchmark or category peers, it could signal a need to exit and seek better-performing alternatives. 
●    Change in risk appetite: An investor's risk tolerance may change over time, prompting them to rebalance their portfolio and exit funds that no longer align with their investment strategy. 
●    Portfolio rebalancing: Periodic portfolio review and rebalancing may necessitate redeeming units in some funds to maintain the desired asset allocation.

How to redeem mutual funds

Directly through AMC 

Mutual fund redemption online directly through an Asset Management Company (AMC) is a simple and cost-effective option. First, visit the AMC's official website and log in to your account using your credentials. Navigate to the 'redeem' or 'sell' options within your portfolio, and select the mutual fund you wish to redeem. Enter the number of units or the amount you want to sell and confirm your transaction. The redemption proceeds will be credited to your registered bank account within the stipulated time frame, usually 1-3 business days for equity funds and 1-2 business days for debt funds. Keep in mind that you may be subject to exit load or capital gains tax, depending on the fund's holding period. Understanding mutual fund redemption days is essential for investors to plan their financial moves and meet their liquidity needs effectively.

Through a trading or Demat account

If you hold your mutual fund units in a trading or Demat account, you can redeem them through your brokerage platform. Log in to your account and find the mutual fund section, usually under the 'portfolio' or 'holdings' tab. Locate the mutual fund you want to redeem and click on the 'redeem' or 'sell' button. Enter the number of units or the amount you'd like to sell and confirm the transaction. The proceeds will be credited to your linked bank account within the specified settlement period. Remember that your brokerage may charge fees for this service, and you may also be liable for exit load or capital gains  tax on mutual fund redemption. Investors should also be aware of the mutual fund redemption time to ensure they receive the proceeds within the expected timeframe.

Offline through an agent or distributor 

To redeem mutual funds offline, you can approach your mutual fund agent or distributor. They will provide you with a mutual fund redemption form, which you must fill out with accurate details, including your folio number, the name of the mutual fund, the number of units or the amount you wish to redeem, and your bank account information. Once completed, submit the form to the agent or distributor, who will then process the request on your behalf. You'll receive the redemption proceeds in your bank account within the stipulated time frame. Note that the agent or distributor may charge a commission for their services, and you may also be subject to mutual fund redemption taxability. 

Why do investors redeem mutual funds?

Investors redeem mutual funds for various reasons, depending on their financial goals, investment strategy, and changing market conditions. Here are some of the key factors that can influence an investor's decision to redeem their mutual fund holdings:

1.    Achieving Financial Goals: One primary reason for investing in mutual funds is to achieve specific financial objectives, such as saving for retirement, purchasing a home, or funding a child's education. Once the investor has reached their targeted corpus or goal, they may redeem their mutual funds to utilise the accumulated funds for their intended purpose.

2.    Portfolio Rebalancing: A disciplined investor regularly reviews and rebalances their investment portfolio to ensure it remains aligned with their risk tolerance and financial goals. Market fluctuations may cause the value of certain asset classes to increase or decrease, affecting the overall balance of the portfolio. In such situations, investors may redeem mutual funds in over-allocated asset classes and reinvest the proceeds in under-allocated assets to maintain the desired asset allocation.

3.    Shift in Risk Appetite: An investor's risk appetite may change over time, influenced by factors such as age, income, and financial responsibilities. For instance, an investor near retirement might prefer to reduce their exposure to risky assets like equities and shift to more stable investments like debt funds. In this case, the investor may redeem their equity mutual fund holdings and reinvest the proceeds in less volatile investment options.

4.    Fund Underperformance: Investors closely monitor the performance of their mutual funds compared to their benchmark index and other similar funds in the same category. If a mutual fund consistently underperforms its benchmark or peers, it may indicate poor fund management, prompting the investor to redeem their holdings and switch to better-performing funds.

5.    Change in Investment Strategy: An investor's investment strategy can evolve due to various reasons, such as changes in personal financial circumstances or macroeconomic factors. For example, during an economic downturn, an investor may adopt a more defensive investment strategy and redeem their mutual funds to invest in safer assets, like gold or government bonds.

6.    Market Timing: Some investors attempt to time the market by redeeming their mutual funds when they believe the market is overvalued or on the verge of a downturn. While market timing can be a risky and unpredictable strategy, those who successfully time their exits and re-entry points may benefit from capitalising on market opportunities.
7.    Liquidity Needs: Unexpected financial emergencies, such as job loss, medical expenses, or urgent home repairs, may compel investors to redeem their mutual funds to meet their immediate liquidity needs. In such situations, investors typically redeem funds that can be quickly liquidated with minimal impact on their overall portfolio.
8.    Tax Planning: Investors may also redeem their mutual funds to offset capital gains or losses for tax purposes. For instance, an investor with a significant capital gain may redeem a mutual fund with a capital loss to offset the gain and minimise their tax liability.

It is essential for investors to carefully consider the implications of redeeming their mutual fund's holdings, such as tax consequences and exit loads, and to consult a financial advisor if needed to make informed decisions that align with their long-term financial objectives.

Open Free Demat Account
Resend OTP
Please Enter OTP
Account belongs to

By proceeding, you agree to the T&C.

More About Mutual Funds