What is redemption in mutual funds? How can you redeem/withdraw your mutual fund investments?

How you can redeem withdraw mutual fund investments
How you can redeem withdraw mutual fund investments
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The main objective of investment is to provide financial security for the future. The real utility of investment is only when the money invested becomes readily available to the investor at the time of their financial needs. So it is equally important to understand the provisions of total/partial withdrawal of investments at the time of making investment in a financial instrument.

What is redemption in mutual funds?

Mutual fund redemption/withdrawal is the process through which investor sells their investments in a particular fund. It may be because of completion of investment tenure/ maturity, sudden need of money or any other reasons. Sometime investors redeem the investment under the belief that the scheme has attained the peak and now it will go down or due to under performance of the fund. 

How redemption of mutual fund units can be done:

Redemption of mutual fund units can be done through off line as well as on line mode.

Off line mode:

The unit holder has to submit a duly filled & signed Redemption Request form to the AMC office or authorized investor service centers or Official Points of Acceptance of Transaction designated by the Registrar. Investor must have mentioned number of units to be redeemed or the redemption amount desired along with folio number and plan detail. After due processing time, the redemption amount will be credited to the registered bank account of the investor. In case of joint account holding, the proceeds will be deposited in the registered bank account of the first named unit holder. 

Online mode:

Mutual funds can be redeemed online through a mutual fund’s website or fund house authorized partner portals. Investor has to log-in the Online Transaction page of the desired Mutual Fund portal / partner portal by using their Folio Number and/or the PAN, select the Scheme and the number of units or the amount they wish to redeem and confirm your transaction. The proceeds will be credited in the registered account number of unit holder after successful processing of the request.

Karvy, CAMS etc. offer the option of redeeming mutual fund units for many AMCs through online and off line mode.

Redemption process can be done through various ways: 

  1. Redemption in mutual funds through Authorized Advisor:

Investor can redeem their funds through the advisor /Distributor by adequately filling the mutual fund redemption form. The advisor will submit the form at the designated office. Once the redemption process is initiated, the redemption proceeds will get credited in the registered account number of investor.

  1. Redemption in mutual funds direct through AMC/ Authorized partner portal:

Investor can redeem mutual fund units directly from the mutual fund house through official portal of the AMC. Investors need to login with the ID and password that they created at the time of purchase of these funds. They can either redeem all the units or partially withdraw of the scheme units subjected to completion of Lock in period.

Investor can visit the AMC office in person and submit the duly filled redemption request also.

Investor’s account will be closed if complete redemption is done. If partial redemption is made, then the balance units will remain and perform accordingly.

Redemption forms may be rejected due to signature mismatch or improper information filled in the request form. Once the request is processed, the redemption amount is credited to the beneficiary registered account.

  1. Redemption in mutual funds through Agencies like CAMS and Karvy etc.

Mutual Fund units can be  redeemed through CAMS (Computer Age Management Services), Karvy and some other authorized financial institutions also, subject to their alliance with the AMC for this purpose. Generally these agencies serve for a  number of AMCs as a single point of contact for various mutual fund transactions and their offices are situated in most of the locations across country.

  1. Redemption in mutual funds through Demat Account

The Mutual fund units bought through Demat account can be redeemed by making a redemption request to Depository Participants & Exchange platforms like NSE MFSS/ BSE STAR platform authorized to trade the mutual fund units. If investor wants to redeem such units through the mutual fund, it is necessary to first convert the units in physical form. This conversion can be done by submitting an application for Re-materialization of units to the Depository Participant. There after investor has to follow the general procedure of redemption by submitting a redemption request.

The redemption procedure generally takes 2 to 4 business days to transfer the payout in the linked registered bank account after the acceptance of redemption request.

When an investor can redeem his mutual fund investment:

Investments in open ended mutual fund schemes are considered as an investment which can be easily converted into cash. Such investments can be redeemed at any time subject to completion of lock in period. Equity Linked Savings Scheme (ELSS) has a lock-in of 3 years from date of investment.

Redemption of close ended scheme units can be done from the AMC only on maturity. Before maturity such units can be liquidated only by selling it in a recognized stock exchange.

Mutual Fund Units pledged as security or under lien to a bank or institution can be redeemed only after removal of the pledge or lien. It is necessary to have clear units in the scheme for Redemption purpose. Trustees of a mutual fund or regulatory authorities can restrict the redemption of units only under extraordinary circumstances.

What, if an investor redeems his investment before stipulated investment period:

It always depends on the discretion of the investor to redeem whether fully or partially as well as frequency of redemption. ELSS investment has a lock in period of 3 years. Some other open ended schemes also have a feature of minimum investment duration in the scheme. They impose exit charges on redemption before this specified period of investment. Generally the duration of this specified period is one year. Any redemption made before this stipulated period attracts an exit load. Such provisions are clearly disclosed in the scheme related documents by the fund house.

As per present guidelines of SEBI 7% of the redemption amount is the maximum limit of exit load to be levied on an investor. However, In order to make scheme lucrative, fund houses generally charge an exit load of 1%.

Suppose an investor invested in a mutual fund scheme having minimum specified investment duration of one year on 15 Jan 2019 and decided to redeem in the month of Nov 2019. The NAV of scheme unit on the day of redemption was Rs 600. 1% exit charge will be levied on such redemption and the units will be redeemed at Rs 594. Liquid funds don’t have any exit charge.

Capital gain taxes are also charged as per the prevailing tax provisions.

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