Mutual Fund Redemption refers to the process where an investor decides to sell or exit his/her investment in a mutual fund scheme, converting the units held into cash. This process is initiated by the investor and executed based on the Net Asset Value (NAV) of the units on the day of redemption.
Contents:
- Mutual Fund Redemption Meaning
- How To Redeem Mutual Fund
- How To Calculate Tax On Mutual Fund Redemption?
- Types Of Redemption
- Mutual Fund Redemption Charges
- Mutual Fund Redemption Time
- Mutual Fund Redemption Tax
- Mutual Fund Redemption Meaning – Quick Summary
- Mutual Fund Redemption – FAQs
Mutual Fund Redemption Meaning
Mutual Fund Redemption is when you take your money out of a mutual fund scheme. It involves selling the mutual fund units back to the mutual fund company, and in return, the investor receives the monetary value of these units based on the current NAV.
Let us take an example to understand this in a simple way: Consider an investor, Mr. Sharma, who invested ₹1,000 in a mutual fund scheme with 100 units at 10 per unit for a total investment of 1,000. If, after a period, the NAV increases to ₹15 per unit and Mr. Sharma decides to redeem his investment, he will receive 1500, representing a 500 profit, excluding any applicable fees or charges.
How To Redeem Mutual Fund
To redeem a mutual fund, the investor must submit a redemption request to the mutual fund company to sell their existing units. When the company gets the request, it sells the units at their current Net Asset Value (NAV) and sends the money to the investor’s bank account, following the terms and any fees or charges that are in place.
- Log in to the Mutual Fund Investment Platform: Access your mutual fund account through a platform like Alice Blue.
- Select the Mutual Fund Scheme: Choose the mutual fund scheme you wish to redeem from your portfolio.
- Submit Redemption Request: Enter the number of units or the amount you wish to redeem and submit the redemption request.
- Receive Confirmation: Upon submission, receive a confirmation of your redemption request.
- Receive the Proceeds: The mutual fund company will process the request, and the redemption amount will be credited to your bank account.
How To Calculate Tax On Mutual Fund Redemption?
Taxes on mutual fund redemptions are calculated based on the type of mutual fund and the holding period. The gains from the redemption are categorized as either Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG), each of which has distinct tax implications. Depending on the type of mutual fund, the tax rate for short-term capital gains is 15%, and for long-term capital gains, it is 10% for gains exceeding 1 lakh in a financial year (plus 4% cess) without any indexation benefit.
For example, consider Mr. Sharma, who has invested in an equity mutual fund. If he redeems his units before one year, any gain he makes is considered as STCG and will be taxed at 15%. So, if he gains Rs 1,00,000, he would incur a tax of Rs 15,000 (15% of Rs 1,00,000) as Short Term Capital Gains Tax.
If Mr. Sharma holds his units for more than one year, any gain he makes is considered as LTCG. If he gains Rs 2,00,000, he will incur a tax of Rs 10,000 (10% of (Rs 2,00,000 – Rs 1,00,000)) as Long Term Capital Gains Tax, since LTCG is applicable only on gains exceeding Rs 1 lakh in a financial year.
Types Of Redemption
There are three types of redemption of mutual funds:
- Unit-Based Redemption
- Amount-Based Redemption
- Full Redemption
Unit-Based Redemption:
In unit-based redemption, the investor specifies the number of units from their mutual fund investment that they wish to redeem. On the date of redemption, the value of the redemption is based on the Net Asset Value (NAV) of the units. For example, if an investor chooses to redeem 100 units and the NAV on the redemption date is Rs 20 per unit, the redemption value would be Rs 2,000.
Amount-Based Redemption:
In amount-based redemption, the investor specifies the amount of the mutual fund investment they wish to redeem. The mutual fund house will redeem the units equivalent to the specified amount based on the NAV on the redemption date. For instance, if an investor wishes to redeem Rs 2,000 and the NAV is Rs 20 per unit, the mutual fund house will redeem 100 units from the investor’s account.
Full Redemption:
Full redemption refers to the process by which an investor redeems all of the units held in a particular mutual fund scheme, thereby closing the investment in that scheme. The redemption value is computed using the units’ NAV on the redemption date. For example, if an investor holds 500 units in a mutual fund, and the NAV on the redemption date is Rs 20 per unit, the investor will receive Rs 10,000 upon full redemption.
Mutual Fund Redemption Charges
Mutual Fund Redemption may incur fees such as exit load, a fee imposed by the mutual fund company when an investor redeems units before the end of a specified period. This fee is typically a percentage of the redemption amount and varies between various mutual fund schemes. The mutual fund company may impose exit loads ranging from 0.5% to 2% of the redemption amount.
If an investor withdraws from a SIP before the completion of the specified period for each installment, an exit load will be imposed. For instance, if the exit load is 1% for redemption within a year and the investor redeems a SIP installment of Rs 10,000 within a year, the exit load for that installment will be Rs 100.
Point to remember: When investing in mutual funds through a Systematic Investment Plan (SIP), each installment is treated as a separate investment with its own exit load period. In the case of a lumpsum investment, the entire amount is considered as one investment. If an investor redeems the lump sum before the specified period, the exit load is applied to the total amount redeemed.
Mutual Fund Redemption Time
The time taken for mutual fund redemption generally ranges between 1 to 3 working days, depending on the type of mutual fund. The redemption process for mutual funds in India adheres to a T+1 system. This means if you submit a redemption request on a trading day (referred to as ‘T’), you will usually receive the redemption amount in your bank account by the next business day (T+1).
For instance, let’s say Mr. Sharma holds units in an open-end mutual fund and decides to redeem them. He submits his redemption request on a Wednesday, which is a trading day and is considered as ‘T’ in this scenario. According to the T+1 system, ‘T’ is the trading day when the redemption request is made, and ‘+1’ is the next business day. So, Mr. Sharma can expect to receive the redemption amount in his bank account by Thursday, the next business day following his request.
This timeline can vary depending on the type of mutual fund, but for most open-end mutual funds in India, the 1 to 3 working days range is a standard expectation for receiving the redemption proceeds.
Mutual Fund Redemption Tax
The tax on redemption of a mutual fund depends on the type of fund and the holding period. Equity mutual funds held for less than a year are subject to a 15% Short Term Capital Gains tax, whereas those held for more than a year are subject to a 10% Long Term Capital Gains tax on gains above Rs 1 Lakh (plus 4% cess) without any indexation benefit.
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Mutual Fund Redemption Meaning – Quick Summary
- Mutual Fund Redemption is selling back units to the mutual fund company to exit the investment.
- Mutual Fund Redemption involves submitting a redemption request, and the proceeds are received based on the current NAV.
- Taxes on redemption are classified as either STCG or LTCG, with different tax rates, such as 15% and 10%.
- There are three redemptions: Unit-Based Redemption, Amount-Based Redemption and Full Redemption.
- Redemption may incur charges like exit load, and the time to receive the proceeds typically ranges between 1 to 3 working days.
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Mutual Fund Redemption – FAQs
Mutual Fund Redemption is when an investor decides to sell or “redeem” their mutual fund units for cash. This process involves the mutual fund company selling the investor’s units and transferring the proceeds to the investor’s bank account.
The redemption rule of mutual funds refers to the set guidelines and conditions under which an investor can redeem their mutual fund units. These rules may include the notice period, the minimum redemption amount, the cut-off time for submitting a redemption request, and any applicable charges or fees like exit load.
To redeem a mutual fund, an investor needs to submit a redemption request to the mutual fund company through a brokerage platform like Alice Blue. Once the request is processed, the mutual fund company sells the units and transfers the proceeds to the investor’s bank account.
Mutual fund redemption generally ranges between 1 to 3 working days, depending on the type of mutual fund. In India, most mutual funds use a T+1 system for redemptions. This means that the investor gets the money by the next business day after the trading day on which the redemption request was made.
After redemption in a mutual fund, the investor receives the redemption amount in their bank account, and the units they hold in the mutual fund are canceled. The redemption amount is calculated based on the Net Asset Value (NAV) of the mutual fund units on the day the redemption request is processed.
Yes, investors can redeem open-end mutual funds anytime. However, for close-end mutual funds, redemptions can only be made during specified periods or at maturity. It’s also important to note that redeeming before a specified period may incur additional charges like exit load.
Yes, mutual fund redemption is subject to tax. The tax implication depends on the type of mutual fund and the holding period. Gains from the redemption of equity mutual funds held for more than a year are subject to Long Term Capital Gains (LTCG) tax of 10%, while those held for a shorter period are subject to Short Term Capital Gains (STCG) tax of flat 15%.
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