How does mutual fund redemption work and what are its types?

Over the years, mutual funds have emerged as a preferred investment choice for many and have become one of the enticing avenues to invest your money in. Such preferences are owing to the convenience of mutual fund investments and availability of a wide range fund schemes. While mutual fund investing is the basic step towards wealth creation, remaining invested for the longterm to reap the wealth benefit is extremely important. When you as an investor submit a withdrawal request for your mutual fund investment, it is known as mutual fund redemption. Read on to knowhow it works, various factors you must consider before submitting the redemption request and different types of redemption.

How does redemption of a mutual fund work?

When you as an investor submit a redemption request for a mutual fund either digitally or via physical mode, such request is acknowledged with time stamped confirmation. In the case of online submission, transaction confirmation is even received over mobile number or email address.

Submission time of redemption request is of great importance, as there’s a cut-off time i.e., 3 PM for mutual fund transaction processing. Note that the processing of the redemption amount is done on the same day’s market price. In case the mutual fund redemption request is received post 3 PM, the redemption amount is processed based on the next working day’s market price.

What are the crucial things you must factor in while submitting the redemption request?

While financial needs might propel you to submit a redemption request, there are certain things you must ensure to keep in mind while submitting the redemption request –

  • Exit load

A few mutual funds come with an exit load, which you must pay if the units get redeemed before a particular period. Such exit loads are computed on NAV (net asset value) for every mutual fund investment or SIP investment as per the exit load charge, which is stated in the factsheet.

  • Lock-in period

Certain mutual fund categories may have a lock-in period. For instance, ELSS or equity linked savings scheme are subject to a lock-in period of 3 years. Likewise, a solution linked schemes may have a lock-in of 5 years or until you reach the age of maturity. This means, you cannot redeem your investment until the lock-in is over. So, before redeeming your mutual fund investment, you must consider the fund’s lock-in.

  • Taxation on investment

There are distinct tax rates for LTCG (long-term capital gains) or STCG (short-term capital gains) on mutual fund investments. LTCG tax rates are usually lower as compared to STCG to incentivize long term investing. Gains on mutual funds are classified as STCG and LTCG depending on the fund’s holding period. So, you must ensure to defer your redemption request until your gains on mutual fund become long-term. Any such savings on taxes may directly affect your overall portfolio returns.

What are the types of redemption available?

  • Unit based redemption

In this kind of redemption, you can mention how many mutual fund units you wish to redeem. The amount you would be receiving will be based on the number of units you requested for redemption.

  • Amount based redemption

In this kind of redemption, you can specify the amount you want to liquidate. Thus, the number of units are deducted automatically depending on the mutual fund’s NAV to match the amount you wished for.

Redeem all

In this kind of redemption, you can redeem your whole mutual fund investment.

Ending note

Mutual funds have the potential of generating high returns over the long term and even the redemption of the scheme is effortless. However, you must have thorough knowledge about when, why, and other crucial parameters that are a must to follow to exit your fund with ease and derive the best out of it.

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