While investors in India have a wide variety of investment instruments to choose from, mutual funds provide an array of schemes by themselves. The types of mutual funds can be broadly classified into: Debt, Equity, Hybrid, Index Funds and such.
When you invest in these funds, it is ideal to have a specific objective and a capacity for risk, along with a short-term or long-term perspective depending on the fund. Mutual funds are convenient, well-regulated and have the potential to provide high returns when compared with other instruments. They may provide high liquidity as well as easy entry/exit options depending on the chosen fund type. Thus, in case of emergencies, you always have the option to liquidate your mutual fund investments.
However, what is the procedure to follow when you would like to redeem. We will also attempt to answer how to redeem mutual funds, when it is feasible to redeem your investment and when you should avoid it.
What is Mutual Funds Redemption?
Mutual fund redemption is the process where the investor intends to sell his/her investments in a particular fund. This could either be due to personal reasons or the investor is speculating a peak in the fund’s performance and keeping funds locked in beyond the current time would not be a good idea. The investor may simply like to switch investments to a different as well.
Just as starting a mutual fund is hassle-free, so is redeeming your mutual fund investment.
Key Methods of Mutual Fund Redemption
Here are a few methods to redeem your mutual fund investment:
Direct Redemption through AMC
If your purchase has been made directly through the mutual fund house (asset management company) then you probably have an ID and password to sign in to their portal. After logging in the investor may easily perform various transactions like buying units and also redeeming any existing fund units.
You can redeem all of the units held in your scheme (if they are not locked-in) or choose to partially withdraw. If you redeem all the units then the account is closed, but if partial redemption is made, then the balance units will remain and perform accordingly.
You can also visit the AMC and submit the duly filled form for redemption. Once the request is processed, the redemption amount reaches the customer via NEFT or through a cheque sent to the registered address.
The online mode is faster than the latter. Hence, it is advisable to go online. Also keep in mind that forms are liable to get rejected due to inaccurate data filled in or signature mismatch. This may lead to unnecessarily delays in the redemption procedure.
Redemption Through Agent
If your investment has been made through an agent, redemption is also possible through the agent. The procedure will involve the filling of the mutual fund redemption form specifying the plan and scheme name, folio number along with the number of units or the amount to be withdrawn. Subsequently the agent submits the form at the office. Once the redemption process is initiated the redemption proceeds gets credited into the beneficiary account via NEFT or a cheque is dispatched to the registered mailing address of the client.
Redemption of Mutual Funds Through Online Portals
Apart from buying mutual funds directly through an AMC or agent, you may also buy mutual funds through online fund house partner portals like www.paisabazaar.com. These partner portals also allow you to place redemption requests. The procedure is quite simple. All one needs to do is create a login ID and password and explore mutual funds. You may redeem your mutual fund the same way you had bought the units. On confirmation of the redemption request is processed accordingly and the money will be directly transferred to your linked bank account.
MF Units Redemption Through Trading or Demat Account
If the mutual funds have been bought through one’s own Demat or trading account then redemption takes place in the similar manner. As the whole trading process is completed online, an e-payout is made against the redemption request into the same bank account that is registered with the Demat account.
Mutual Fund Unit Redemption through CAMS
Computer Age Management Services gives individuals the option to redeem mutual funds of several AMCs through their office. A redemption form may be downloaded and post filling it out and signing, it may be submitted at any CAMS office. Other agencies like Karvy Computershare also provide these services. The investor stands to benefit by choosing these agencies as a lot of services for different AMCs can be availed through a single point of contact.
Once the redemption request is processed, it cannot be cancelled, revoked or altered. Mutual fund redemption request cannot be placed for a particular date or price. The request once received by the concerned office is then processed at the applicable NAV of the particular day. If the request is received before 3 p.m. of the business day then the NAV of the same day is taken into consideration or else it is redeemed at the NAV of the next business day.
After receiving the redemption request the details are verified and the payout is usually made within 2-4 business days into the registered bank account of the investor. In case of cheque dispatch, it may take a couple of more days to complete the process.
Reasons to Redeem Mutual Fund Units
Though an individual may redeem his/her mutual fund at their own will after the lock-in period if any is completed, it is essential to keep certain things in mind before a redemption request is placed. This will help an investor from making pre-mature withdrawals that affect the final payout costs. Investors should sell their investments for only specific reasons:
If the investment goal has been achieved. Say one had started investing to buy a car in 5 years. As time passes our priorities, goals and objectives change. If there is a need for liquidity in an emergency situation, then selling units could meet this requirement.
If there are changes in the scheme which is henceforth not suitable for the investor or it does not fit his investment objective. Since fund managers have their individual style of investing, when one exits the style of investment changes. However,iIt is advisable to observe the performance of the fund for a year and then take a call.
If the scheme or fund is under performing, whereas the benchmark and peer funds are doing much better. This would mean parking money in a loss making fund or a fund that is only providing minimal returns. A temporary poor performance, however, does not necessarily mean that in the long run the same would continue. But if a fund is consistently performing poorly, it is a good idea to exit by liquidating the available units.
Things to Consider Before Initiating Redemption
Type of fund: If one has invested in an ELSS which comes with a lock-in period of 3 years which means each unit should be held for at least 3 years before redemption even if it is purchases through the SIP (Systematic Investment Plan) route. Similarly, if you have close ended funds or fixed maturity plans (FMP), then redemption can happen only at expiry of the term or at maturity date. So one should be aware of the scheme he/she has invested in. If the close ended fund is trading at the exchange, then you might exit from it at maturity, but then it depends upon the volume traded and the price per unit offered.
Exit Load: Open ended funds do not come with a lock-in period. But if the funds are redeemed within a specified period then they would attract an exit load. For example: if a fund is redeemed within 1 year then an exit load of 1% may be applicable. The exit load amount varies as it is not a statutory charge, the period and percentage of load is scheme-specific.
Pay-out time: Usually it takes 2-4 business days for the pay-out to get credited in the beneficiary account. Hence it is sensible to plan ahead if the funds are required for a specific purpose.
Tax Implication: If equity-based mutual funds are held for more than a year then they are not taxable for the investor. But if it is redeemed within a year, it would attract a long term capital gains tax of 15% along with surcharge and education cess. And if the same fund is invested in non-equity based mutual funds, then it would be taxable at the rate of 20% with indexation if it is held for over 3 years. If it is redeemed within 3 years then individual tax slab rate is applicable as long term capital gains tax. Tax is not deducted at source and is paid by individuals themselves.
Market Volatility: This should be least of the reasons to exit from a fund. In fact market experts and analysts always advise to buy high value yet low priced stocks in the opportunity of any market fall. Buy low and sell high that’s the old wisdom of the market. But most of us do the reverse.
Every dip should be used to buy additional units in a high performing fund and take advantage of the situation in the long term. Exiting a fund during a bear irun would only mean low returns or capital erosion. Though these investments are susceptible to short term fluctuations, in the long term, equity investments have always appreciated. So instead of getting panicky and being just another sheep and following the crowd, use a market slowdown to plan your investments cheaply.
While mutual fund investments are quite flexible as far as the investment amount, period of investment and redemption is concerned, one should have a long-term horizon when choosing these funds. Long-term perspective makes room for ample wealth creation, capital protection and appreciation. Long-term investments demand a high level of commitment, discipline, effort and time, but the result is worth the wait.
More and more people nowadays are turning towards these funds due to the high returns they offer. Diversification helps in safeguarding one’s asset. Mutual fund investments could be aimed for retirement planning and meeting long-term financial goals, however short-term gains is also a possibility.
When an individual opts to take up exposure in stocks directly, then it is not always possible to create a diversified basket of stocks that would mitigate all risk possibilities. Mutual funds on the other hand, due to their huge AUM, can diversify, buy and sell shares of multiple companies conveniently.