Redemption of Mutual Funds: Here’s How to Go About

October 9, 2024 Mutual Fund

Mutual funds are a popular investment choice for both novice and seasoned investors, offering diverse exposure to equities, debt, and other asset classes. While many focus on selecting the right mutual fund or choosing the best SIP (Systematic Investment Plan), an often-overlooked aspect is how and when to redeem or sell mutual funds.

Investing in mutual funds is often seen as a long-term commitment toward wealth creation and achieving financial goals. However, circumstances may arise when investors need to redeem their investments, whether to meet personal financial needs, capitalise on profits, or simply due to changing market conditions. This process, known as redemption, involves selling the mutual fund units back to the fund house or in the market, receiving the current market value based on the Net Asset Value (NAV) on the redemption date.

The decision to redeem mutual funds is not one to be taken lightly. It requires careful consideration of several factors, including market conditions, the impact on your financial goals, and the tax implications. With the Indian equity market experiencing heightened volatility in 2024 due to escalating geopolitical tensions, many investors are grappling with the question: should I redeem my mutual funds now? Understanding how and when to redeem your investments is crucial in navigating these uncertain times.

[Read: Should You Sell Your Mutual Funds Now]

While the redemption process can be straightforward-whether online or offline-the timing of your redemption is key. Redeeming during market downturns can lock in losses, whereas strategically holding on during temporary volatility may yield better returns in the long run. Conversely, if you need liquidity or your investment no longer aligns with your financial strategy, redeeming your mutual funds could be a prudent move.

In this article, we will guide you through the process of redeeming mutual funds in both offline and online modes. Additionally, we will explore important considerations to keep in mind before deciding to redeem your investments, particularly in light of the current volatility in the equity market. Whether you’re looking for short-term liquidity or reevaluating your long-term financial strategy, understanding how to go about redemption will empower you to make informed decisions.

Let’s dive deeper into the mechanics of mutual fund redemption and the strategic aspects of when and why you should sell your investments amidst the ever-evolving market landscape.

1. Redemption through Offline Transactions

If you have invested in mutual funds offline, you may need to redeem your investments offline as well. Here’s how you can go about it:

Step 1: Obtain the Redemption Form

You need to visit the fund house’s office or a registered distributor to get a mutual fund redemption form. This form can also be downloaded from the mutual fund’s website or collected from the registrar of the mutual fund, such as CAMS or KFintech.

Step 2: Fill in the Details

The form will ask for details like your folio number, the scheme name, and the number of units you wish to redeem. If you want to redeem all your holdings, you can mention ‘All Units’ in the relevant section.

Step 3: Submit the Form

Once the form is filled, please submit it to the fund house or the registrar. Upon submission, the fund house will process your request. Typically, the redemption amount is credited to your registered bank account within a few business days.

Step 4: Track the Status

You can track the status of your redemption by calling the customer care of the fund house or checking on their website. The money is credited based on the NAV of the fund on the date of redemption.

[Read: How to Sell Mutual Funds Online: A Step-by-Step Guide]

2. Redemption through Online Transactions

Redeeming mutual funds online is simpler and more efficient, especially in the digital age. Here’s how you can redeem your investments online:

Step 1: Log in to Your Mutual Fund Account

Most fund houses and mutual fund distributors offer an online portal for managing your investments. Log in using your credentials.

Step 2: Select the Scheme to Redeem

Navigate to the section that displays your portfolio, and select the scheme from which you wish to redeem units.

Step 3: Choose Redemption Options

You will usually get two options: redeem a specific number of units or redeem the entire investment. Select the appropriate option, enter the units or amount to redeem, and proceed.

Step 4: Confirm the Transaction

After verifying the details, submit the redemption request. You may receive a confirmation email or SMS. The redemption amount will be credited to your registered bank account based on the NAV on the date of redemption.

Step 5: Monitor the Payment

Online redemptions usually take 1-3 business days. The proceeds will be credited directly to your registered bank account.

Redemption of Mutual Funds Amidst Current Market Volatility

The Indian equity market in 2024 has been facing substantial turbulence, driven largely by escalating geopolitical tensions, inflationary concerns, and global economic uncertainty. In such volatile times, many investors may feel anxious about their mutual fund investments and wonder whether it’s the right time to redeem their units.

While redeeming your mutual funds in response to market instability is tempting, reacting impulsively to short-term fluctuations can undermine your long-term financial strategy. It’s essential to take a measured and rational approach when considering mutual fund redemptions during volatile market conditions.

One of the most important factors to consider during such volatile times is your investment horizon. Mutual fund investments, particularly equity funds, are designed to yield substantial returns over the long term. Short-term market dips are an inherent part of equity market cycles, and redeeming your funds in reaction to temporary volatility can lead to a significant loss of potential gains when markets eventually recover.

If your financial goals are still years away, such as saving for retirement or children’s education, you may want to avoid redeeming and staying invested, allowing the market to stabilise and recover. Before deciding to redeem, evaluate whether these external factors will have a lasting effect on your portfolio or if it is just temporary market noise. By staying invested in fundamentally sound mutual funds, you can position yourself for potential gains when the market rebounds.

However, if you are in a situation where you need funds for an emergency or short-term financial requirement, consider partial redemptions or redeeming from liquid or debt funds that have lower market risk. This can help you avoid exiting from equity funds during a downturn, thereby protecting your long-term wealth-building strategy. Always evaluate the exit load and tax implications associated with your redemptions, as they can impact your net returns.

Points to Consider When Redeeming Mutual Funds

Before deciding to redeem your mutual fund investments, especially during times of volatility like today’s market scenario driven by geopolitical tensions, consider the following factors.

1. Market Conditions and Timing

Given the current volatility in the Indian equity market, primarily due to escalating geopolitical tensions and economic uncertainties, timing your redemptions is crucial. During volatile markets, NAVs can fluctuate widely. Redeeming during a market downturn could result in significant losses. However, if you urgently need liquidity, redemption might be necessary but try to avoid panic-selling based on short-term market movements.

2. Exit Load and Tax Implications

• Exit Load: Some mutual funds levy an exit load if you redeem your investment within a specified period, usually ranging from 0.5% to 1% of the redemption amount. For instance, if you sell your units within one year of purchase, you might be charged a higher exit load.

  [Read: What is Exit Load in Mutual Funds and How Is It Calculated]

• Capital Gains Tax: Mutual fund redemptions are also subject to capital gains tax, which varies based on the type of fund and the holding period. As per the amendments made in the Modi 3.0 budget against the capital gains tax, the transfer of units before July 23, 2024, of equity mutual funds shall be taxable at STCG – 15% and LTCG – 10% (without indexation) for transfers on or after July 23, 2024, shall be taxable at STCG – 20% and LTCG – 12.5% (without indexation w.e.f July 23, 2024).

  [Read: The Changes in Capital Gain Tax Done by Modi 3.0 Budget 2024-25 You Need to Know]

  For equity mutual funds, if you redeem within one year, you will be subject to short-term capital gains tax at 20% as against 15% earlier. For holdings longer than one year, long-term capital gains tax applies 12.5% on gains exceeding Rs 1.25 lakh per year. For debt funds, the tax rates are different. Consult a tax advisor to understand the tax implications before redeeming your units.

3. Impact on Portfolio Diversification

Redemption should also be considered from the perspective of portfolio diversification. Redeeming a significant portion of your mutual fund holdings could distort the asset allocation of your portfolio.

For example, if you redeem equity funds, you may end up being under-exposed to equities, which could affect your portfolio’s potential for growth. Always ensure that your redemptions align with your overall portfolio strategy and risk appetite.

4. Consider Rebalancing Instead of Redeeming

Rather than completely redeeming your mutual funds, consider rebalancing your portfolio. During times of market volatility, rebalancing helps you adjust the weight of different asset classes (equity, debt, gold, etc.) to match your risk profile and financial goals.

For example, if equities are underperforming and debt offers stability, you could shift some of your equity investments to debt funds without completely exiting the equity market. This way, you avoid redeeming at a loss while ensuring your portfolio remains aligned with your goals.

5. Emergency Situations

There are scenarios where redemption may be unavoidable, such as medical emergencies or other unforeseen financial crises. In such cases, consider liquidating from funds with lower exit loads and minimal tax liabilities. Debt funds or liquid funds are often more suitable for emergency withdrawals than equity funds due to their lower volatility and immediate access to cash.

In conclusion,redemption of mutual funds, whether offline or online, is a relatively straightforward process, but the decision to redeem should not be taken lightly. Consider market conditions, exit loads, tax implications, your financial goals, and the impact on portfolio diversification before redeeming your investments.

This article first appeared on PersonalFN here