Investors often find themselves needing to cash out their mutual fund investments for various reasons, such as financial emergencies or to reallocate their funds. This process is known as mutual fund redemption, and it can be carried out either partially, by selling specific units or in its entirety. It allows investors to convert their mutual fund units back into cash. This can be done partially by selling a specific number of units or in full by cashing out the entire investment. Mutual fund redemption is usually initiated when investors need to access their invested capital, address financial emergencies, or reallocate their funds to other investment options. The proceeds from the redemption are based on the mutual fund's Net Asset Value (NAV) at the time of redemption, and any applicable taxes or exit loads may affect the final amount received by the investor.
What are the types of redemption?
There are three primary types of mutual fund redemption:
- Unit-based redemption: Investors specify the number of units they want to redeem, and the amount received is determined by the units redeemed and the current NAV.
- Amount-based redemption: Here, investors specify the desired redemption amount, and the number of units is adjusted to match that amount based on the NAV.
- Redeem all Units: This allows investors to liquidate their entire investment in the mutual fund.
- Systematic Withdrawal Plan (SWP): A systematic withdrawal plan is a pre-arranged schedule for regularly redeeming a set amount of money or a specific number of units from the mutual fund. SWPs are typically used by investors who want a steady stream of income from their investments.
Exit loads associated with redemption
Most mutual funds encourage long-term investments and exiting before a specified period may incur an exit load on the withdrawn amount. The minimum investment holding period can vary between equity and debt funds, and certain types of debt funds have shorter holding periods. Exit loads are fees charged by mutual funds when investors redeem or withdraw their investment before a specified holding period. These fees are designed to discourage short-term or frequent trading in the fund and compensate the fund for potential costs associated with such redemptions. Exit loads can vary between mutual funds and are typically expressed as a percentage of the amount being redeemed.