3 min
18-September-2024
Managed by fund managers, mutual funds are suitable for investors who do not have flexible schedules or the inclination to monitor daily market movements. Not just to grow wealth, mutual funds can also be liquidated during emergencies/personal use or to simply invest the money elsewhere. This procedure to exit a mutual fund is known as mutual fund redemption. Investors have the option to redeem certain units or exit the mutual fund completely.
The sale of mutual funds takes a different model as compared to the sale of stock or ETFs (exchange-traded funds). Companies with mutual funds often have cash reserves as backup to compensate for redemptions so they do not have to liquidate holdings before the right time. In this article, we will learn what is the best time to redeem mutual funds and the process to exit them.
Typically, the exit load is approximately 1% of the total amount that is withdrawn. The exit load differs for equity mutual funds and debt mutual funds and varies for ultra-short and short funds. Also, the mutual funds’ returns are subject to capital gains taxes based on the amount and holding period. The exit load and capital gains tax can considerably affect the final return in hand. So before investors exit a mutual fund, they should review the exit loads.
At times, investors redeem their mutual funds based on the prevailing market sentiment or if they plan to invest their money in other financial instruments. For example, an investor may choose to exit their mutual funds when the market is exhibiting bearish tendencies as they might want to evade further losses.
Redeeming mutual funds is an individual call and should be taken by investors only after they have carefully considered their financial goals, current and future and the expenses that come along with it.
To redeem mutual funds online, investors can visit the official page of the mutual funds’ website and log on to their account. The redemption request here will require similar details like the folio number and/or PAN, scheme type and the number of units that need to be redeemed.
Mutual funds can be redeemed through the following ways.
AMC: Most asset management companies have a portal, mobile app and dedicated fund managers to handle such customer requests. Based on their online infrastructure, investors can choose to redeem their mutual funds via the portal or mobile app.
Demat: If investors have bought mutual funds from their demat account, they can simply log into their account online using the website or app and apply for a redemption. After a few days of the request, the payment will be processed via the mode of payment that the investor has opted for. In most cases, the money is transferred back to the bank account that is linked with the demat account.
If the application goes through before 3 PM, the mutual funds will be calculated based on the current day’s NAV. However, if the application is submitted after 3 PM, then then mutual fund units for redemption would be computed based on the following day’s NAV. While this scenario might seem inconsequential, it could possibly lead to a significant difference in the final returns, if there is a palpable variance in the NAVs of the two days.
Capital gains tax: The period for which mutual funds are maintained play an integral role in the overall returns. For equity mutual funds, the time frame lasting less than a year is deemed to be short-term. Such short-term capital gains are taxed at a rate of 15%. On the other hand, the capital gains of mutual funds held for more than a year (long-term) are tax-free up to Rs. 1,00,000. Anything exceeding this limit is taxed at a rate of 10%.
The taxing system for debt funds is different for debt mutual funds. Here short-term capital gains stand for mutual funds held for less than three years and they are taxed according to the tax rate the investor is eligible for. Conversely, long-term capital gains are taxed at the rate of 20% alongside indexation.
Often, short-term capital gains are taxed more than long-term ones. Therefore, when one plans to redeem their mutual funds, they should factor in the taxes to understand what their final earnings would be like.
Exit load and other expenses: Exiting a mutual fund scheme before it matures leads to additional fees in the form of exit load. The rate of exit load is based on the type of mutual fund, and generally is a fixed percentage that falls between 1% to 2%.
At the moment, the Ministry of Finance charges 0.001% of tax as STT (securities transaction tax) for specific funds. This tax is imposed when the investors purchase or sell units of equity or equity-forward funds. This does not apply to debt equity funds.
To kickstart your investment journey, visit the Bajaj Finserv Mutual Fund platform where you can use financial tools like the SIP calculator and lumpsum calculator to plan your financial goals. Plus, you can compare and choose from 1000+ mutual funds plans to invest in schemes that will help maximise your wealth in the most lucrative way possible.
The sale of mutual funds takes a different model as compared to the sale of stock or ETFs (exchange-traded funds). Companies with mutual funds often have cash reserves as backup to compensate for redemptions so they do not have to liquidate holdings before the right time. In this article, we will learn what is the best time to redeem mutual funds and the process to exit them.
Understanding mutual funds redemption
Based on the mutual fund categories, investors are charged with fees if they want to redeem their mutual funds. On specific occasions, investors are charged with exit load in case they choose to redeem the fund units before the stipulated time frame.Typically, the exit load is approximately 1% of the total amount that is withdrawn. The exit load differs for equity mutual funds and debt mutual funds and varies for ultra-short and short funds. Also, the mutual funds’ returns are subject to capital gains taxes based on the amount and holding period. The exit load and capital gains tax can considerably affect the final return in hand. So before investors exit a mutual fund, they should review the exit loads.
What is the right time to redeem mutual funds?
While it would be convenient to have the answer to the aforementioned question, there really is no ‘right’ or ‘wrong’ time to exit a mutual fund. What one decides exclusively relies on their investing goals. Mutual funds can be liquidated for a variety of short-term goals like going for a holiday or purchasing a car, or long-term goals like investing on a property, retirement or a child’s higher education.At times, investors redeem their mutual funds based on the prevailing market sentiment or if they plan to invest their money in other financial instruments. For example, an investor may choose to exit their mutual funds when the market is exhibiting bearish tendencies as they might want to evade further losses.
Redeeming mutual funds is an individual call and should be taken by investors only after they have carefully considered their financial goals, current and future and the expenses that come along with it.
How to redeem mutual funds?
Investors can redeem mutual funds online or offline. If it is done with the offline method, they require to turn in a signed redemption request paperwork to the Registrar’s Office or AMC (asset management company). The form will require details such as the name of the mutual funds’ holder, folio number, and the number of units to be redeemed along with their official signature. After the request is processed, the returns will be transferred to the registered bank account of the holder.To redeem mutual funds online, investors can visit the official page of the mutual funds’ website and log on to their account. The redemption request here will require similar details like the folio number and/or PAN, scheme type and the number of units that need to be redeemed.
Mutual funds can be redeemed through the following ways.
AMC: Most asset management companies have a portal, mobile app and dedicated fund managers to handle such customer requests. Based on their online infrastructure, investors can choose to redeem their mutual funds via the portal or mobile app.
Demat: If investors have bought mutual funds from their demat account, they can simply log into their account online using the website or app and apply for a redemption. After a few days of the request, the payment will be processed via the mode of payment that the investor has opted for. In most cases, the money is transferred back to the bank account that is linked with the demat account.
What are the things to remember before redeeming mutual funds?
Day and time: The settlement cycle for every mutual funds’ category varies from T+1 to T+7 days which exclusively fall under business days and do not include weekends. Therefore, when investors apply for a redemption, they should be aware of the settlement cycles to avoid any unpleasant surprises later. In addition, mutual funds are redeemed on the basis of net asset value or NAV. which is the value at which the fund is traded at on the public exchange. Currently, the cut off time for NAV is 3 PM.If the application goes through before 3 PM, the mutual funds will be calculated based on the current day’s NAV. However, if the application is submitted after 3 PM, then then mutual fund units for redemption would be computed based on the following day’s NAV. While this scenario might seem inconsequential, it could possibly lead to a significant difference in the final returns, if there is a palpable variance in the NAVs of the two days.
Capital gains tax: The period for which mutual funds are maintained play an integral role in the overall returns. For equity mutual funds, the time frame lasting less than a year is deemed to be short-term. Such short-term capital gains are taxed at a rate of 15%. On the other hand, the capital gains of mutual funds held for more than a year (long-term) are tax-free up to Rs. 1,00,000. Anything exceeding this limit is taxed at a rate of 10%.
The taxing system for debt funds is different for debt mutual funds. Here short-term capital gains stand for mutual funds held for less than three years and they are taxed according to the tax rate the investor is eligible for. Conversely, long-term capital gains are taxed at the rate of 20% alongside indexation.
Often, short-term capital gains are taxed more than long-term ones. Therefore, when one plans to redeem their mutual funds, they should factor in the taxes to understand what their final earnings would be like.
Exit load and other expenses: Exiting a mutual fund scheme before it matures leads to additional fees in the form of exit load. The rate of exit load is based on the type of mutual fund, and generally is a fixed percentage that falls between 1% to 2%.
At the moment, the Ministry of Finance charges 0.001% of tax as STT (securities transaction tax) for specific funds. This tax is imposed when the investors purchase or sell units of equity or equity-forward funds. This does not apply to debt equity funds.
Closing thoughts
There is no definitive answer to ‘what is the right time to redeem mutual funds?’ It ultimately depends on your position as an investor as well as future fiscal objectives. However, every investor should seriously consider the impact of charges like exit load, taxes as well as time period to ensure that they do not get the short end of the stick.To kickstart your investment journey, visit the Bajaj Finserv Mutual Fund platform where you can use financial tools like the SIP calculator and lumpsum calculator to plan your financial goals. Plus, you can compare and choose from 1000+ mutual funds plans to invest in schemes that will help maximise your wealth in the most lucrative way possible.
Essential tools for all mutual fund investors
| Mutual Fund Calculator | Lumpsum Calculator | Systematic Investment Plan Calculator | Step Up SIP Calculator |
| SBI SIP Calculator | HDFC SIP Calculator | Nippon India SIP Calculator | ABSL SIP Calculator |
