Mutual fund redemption
A mutual fund redemption request is the request to withdraw units (amount) from your mutual fund investments.
Things to consider while submitting a redemption request.
Mostly financial needs and sometimes our sentiments (fear) owing to certain market situations drive the redemption request. There are some essential things to keep in mind while submitting a redemption request:
Some mutual fund schemes carry an exit load. You, as an investor, have to be pay the exit load if you redeem the units before the specified period. Such exit load is levied on the redemption NAV, and accordingly, it directly impacts the overall portfolio returns. If the exit load window is nearing an end, it may be prudent to defer the redemption request up to that period, if possible, to protect the portfolio returns.
Some of the mutual fund categories are subject to a lock-in period. For example, ELSS (Equity Linked Savings Scheme) funds are subject to a 3-year lock-in period. Similarly, solution-oriented schemes like a retirement fund or a children fund, mostly carry a lock-in period of 5 years or till retirement age or attainment of the majority age by the child as applicable. The investor cannot liquidate the investments until the lock-in period is over. Therefore, investors need to consider the lock-in period expiry when planning mutual fund redemption.
Holding period for taxation
You have to pay tax on the appreciations (gains) in your mutual fund investment only at the redemption of mutual funds units. The gains are classified as long-term capital gains (LTCG) and short-term capital gains (STCG) based on the holding period of such mutual fund units. There are different tax rates for LTCG and STCG from mutual fund investments. The tax rates for LTCG are generally lower than STCG to incentivise long-term investing by the taxpayers. It is advisable to defer redemption, if possible, until the gains become long term. Any savings on taxes directly impact the overall portfolio returns favourably.
The process of mutual fund redemption
After you have considered all the factors regarding redemption, it is now time to know how to proceed with it.
You can redeem a fund digitally (online – directly through the web portals of the mutual fund companies by submitting a redemption request form) or through a physical redemption request form or a letter at the local offices of the concerned fund houses. This request is acknowledged with a time-stamped confirmation. For online requests, you will receive transaction confirmation also over your registered email address and mobile number. Take the help of your mutual fund distributor for a hassle-free process of redemption.
The time of submission of the request is also important as there are cut-off times to process transactions. Transactions received before 3 PM are considered same-day transactions. If you submit the redemption request after 3 PM, your transaction will be processed on the next working day. You will receive the redemption amount in your registered bank account after deduction of the applicable STT and stamp duty, if any.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
The tax provisions mentioned in this article are for illustrative purposes only. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption.