Mutual Fund Redemption: What is it and How to Redeem Fund Units

At times, there are circumstances where investors are required to withdraw their money from mutual funds because of personal financial needs or to invest in a better option. Mutual fund redemption is simply the process of cashing out some or all of your mutual fund investment. This means selling your units back to the mutual fund company at the current Net Asset Value (NAV) and getting money in return.

You can redeem either part of your investment by specifying a certain number of units, or you can redeem your entire investment in the fund. If you submit your redemption request to the fund company before 3 pm on a trading day, the NAV of that day will be used to calculate the amount you get. If you submit it after 3 pm, the next day’s NAV will be applied.

Investors decide to redeem units based on their financial goals, need for cash, or changes in the market.

Reasons for Mutual Fund Redemption

Need for Cash: Investors often sell mutual fund units to get cash for specific financial goals or urgent needs.

Market Conditions: Market trends can influence investors' decisions. They might sell to avoid losses in a bear market or to lock in profits during a bull market.

Impact on Financial Portfolio: Selling mutual fund units affects an investor's overall portfolio, so it’s essential to consider how this might impact their financial goals and asset allocation.

Timing of Redemption: The redemption amount depends on the Net Asset Value (NAV) at the cut-off time, which is 3 pm. Since NAV changes daily, investors need to be mindful of the cut-off time when submitting redemption requests.

How to Redeem Mutual Funds Online?

Let us understand the process of mutual fund redemption

Log In to Your Account: Go to the website or app of the platform where you bought your mutual fund (e.g., AMC website, broker, or investment app).

Go to Your Portfolio: Look for a section like "My Investments" or "Portfolio." Here, you’ll see a list of your mutual fund holdings.

Choose the Fund to Redeem: Select the mutual fund you want to redeem (sell). Most platforms will show a "Redeem" or "Sell" option next to each fund.

Select Redemption Type: Decide how much you want to redeem:

Full Redemption: Sell all your units in the fund.

Partial Redemption: Sell only some units.

Confirm the Redemption: Enter any required details, review the transaction, and click "Confirm." You may need to enter a password or OTP for security.

Wait for Processing: After redeeming, the fund provider will process your request. It can take 1-3 business days (or longer for certain funds) for the money to reach your bank account.

Check Your Account: Once processed, you will receive the money in your linked bank account, and you will see a confirmation in your portfolio.

Types Of Redemption

As explained earlier, Mutual Fund redemption is the process of selling or withdrawing units from a mutual fund, either partially or fully. Here are the common types of mutual fund redemptions:

Full Redemption: Selling all the units held in a mutual fund scheme, effectively closing the investment. This usually means exiting the fund completely, and any gains are realized at this point.

Partial Redemption: Selling only a portion of the units held, allowing the investor to continue holding a reduced number of units in the fund.

Systematic Withdrawal Plan (SWP): This is a planned, periodic redemption where the investor withdraws a fixed amount at regular intervals (e.g., monthly, quarterly). It allows for regular income without fully exiting the fund.

Redeeming on Maturity: For close-ended mutual funds (like Fixed Maturity Plans or FMPs), redemption occurs only at the end of a fixed term or maturity period. The investor cannot redeem units before this period, except in some special cases (e.g., funds listed on stock exchanges).

Automatic Redemption (Triggered Redemption): Some mutual funds offer redemption based on specific conditions or triggers, such as reaching a certain NAV level, achieving a target return, or reaching a specific date.

Tax-Linked Redemption: In cases like Equity Linked Savings Schemes (ELSS), units are locked for a minimum period. Redemption can only be done after this period to avoid penalties or restrictions.

Early Redemption (Premature Redemption): Some funds, particularly closed-ended or tax-saving funds, may impose a penalty or exit load for early redemption.

Exit Loads for Mutual Fund Redemption

Many mutual funds impose an exit load, which is a fee charged on redemption if units are sold within a specific period (e.g., one year from the date of purchase). It’s essential to understand exit load terms before redeeming.

When To Redeem Your Mutual Fund Units?

Here is a simple guide on when to consider redeeming:

• Redeem if you need money for a specific financial goal, like buying a house or funding education.
• If the market is doing well and your investment has increased significantly in value, it might be a good time to sell and lock in profits.
• If your mutual fund is consistently underperforming compared to its peers or the market, you might want to redeem your units and invest in a better option.
• If your financial goals or risk tolerance have changed, you may want to redeem your mutual fund and invest in something that better aligns with your current strategy.
• If you suddenly need cash for emergencies or unexpected expenses, redeeming some of your mutual fund units can provide quick access to funds.
• Be aware of any exit loads or fees associated with redeeming your units. If these are high, it might be better to wait until the charges are lower.

Conclusion
Investors can use redemptions to their advantage. It is important to understand different situations and how they might affect financial goals. Before deciding to redeem a mutual fund investment, think about why you are doing it. If you are unsure, it is often better to stay invested until you see a clear reason to exit.