How To Redeem Mutual Fund?

In the previous chapter, we have covered the aspects required to invest in a mutual fund, but understanding how to exit and the exit process is also essential. So, in this chapter, we’ll learn about the process of mutual fund redemption, how it works and some key pointers to keep in mind while redeeming mutual funds. 

Mutual funds have quickly emerged as the investment vehicle for millions of Indian investors seeking to conveniently participate in asset classes like equity, debt and gold. They offer multiple benefits like diversification, flexibility, affordability, liquidity and professional management. However, investors may consider redeeming or withdrawing funds from their mutual fund schemes to meet specific needs. 

What is Mutual Fund Redemption? 

Let’s first understand what mutual fund redemption involves:

• It refers to selling or withdrawing your purchased mutual fund units to the Asset Management Company (AMC) or fund house.
• Redeeming units allows investors to receive actual cash in exchange for units they had bought earlier at a particular NAV.  
• The AMC buys back the units from investors at the prevailing Net Asset Value (NAV) rates and credits the realised sale proceeds directly into their registered bank account.
• It is the opposite process of investing in mutual funds, where unit holders pay cash to purchase units at applicable NAV.

Types of Mutual Fund Redemptions

There are three broad types of mutual fund redemptions:

1. Full Redemption: Unit holders opt to redeem or sell all the mutual fund units held under a particular scheme. The investor receives back the entire corpus invested in that scheme in case of complete redemption and is generally chosen when an investor decides to exit from that mutual fund scheme for good.
2. Partial Redemption: Only a part of the mutual fund units held in a scheme are sold back while the balance units remain invested in the markets. This alternative helps meet short-term cash needs without fully preceding future upside potential. The residual investment amount equals the prevailing value of units retained in the folio. 
3. Systematic Withdrawal: Enables periodic redemption of a fixed amount or fixed number of mutual fund units on pre-determined dates. Applicable for regular cash flow needs, especially in retirement years. Flexibility to select periodicity - monthly, quarterly, half-yearly or annual redemption frequency.

Linking NAV with Redemption Proceeds

When you redeem your purchased mutual funds, the actual cash proceeds paid out wholly depend on the prevailing NAV:

• The applicable NAV rate varies depending on when the AMC receives your redemption request. 
• The number of units you opt to redeem is multiplied by this applicable NAV rate for the day the transaction is processed. 
• Other charges or fees, if any, are adjusted accordingly to arrive at the amount of your final redemption proceeds.

Placing Redemption Request 

Given below are some of the most popular ways in which mutual fund unit holders can place requests for redeeming holdings:

• Using the AMC Online Portal  

•     Unitholders log in to the official AMC website using registered credentials.
•     The desired number of units to redeem are selected from overall holdings 
•     Bank account specified to receive realisation proceeds

• Physical Offline Process  

•    Physical applications or forms required for initiating redemption request
•    Submitted at the nearest designated investor service centres or collection points
•    Mode better suited for those less comfortable using technology

• Through Online Trading and Demat Accounts 

•     Integrated investment platforms also facilitate mutual fund redemptions
•     Units held in demat form can be redeemed by placing a redemption order  

• Registrar and Transfer Agent (RTA) Interface

•     RTA portals like CAMS and Kfin Tech allow smooth processing of redemptions 
•     RTAs maintain investor records and details for fund houses

• Via Financial Advisors 

•    Transaction requests can be placed through assigned mutual fund agents
•    Useful for investors who rely entirely on agent services

Vital Aspects Concerning Redemptions

Certain key aspects concerning mutual fund redemptions include:

• Applicable NAV: Upon receipt of a valid redemption request by the uniform cut-off time
• Cooling Off: Redemption request cancels within a specified number of days.
• Minimum Holding: The minimum units held requirement is satisfied for redemption.
• Bank Details: Correct account details must be provided to ensure the smooth processing of the payout.
• KYC: Physical verification is crucial for executing PAN/KYC documentation redemption requests.

Timing of Redemption

Evaluating appropriate timing for mutual fund redemptions warrants assessing:

1. Original Goal Achievement: In case the envisaged objective is, for example, amassing the necessary corpus to purchase a residential property, investors may liquidate holdings.
2. Prolonged Underperformance: Redemption is justified when a fund fails to outperform the category benchmarks over 3- 5 years despite several fund manager changes.
3. Portfolio Rebalancing: At the asset allocation level, pruning exposure to heavily overvalued sectors through redemptions.
4. Urgent Cash Flow Needs: Situations like medical emergencies, job losses, or other problems call for cash generation using partial but judicious redemptions.
5. Booking Profits: Profit booking in equity schemes can be executed during bull runs or NAV surges. At the same time, the erosion in value is managed by not being too hasty in bear phases or volatility.
6. Tax Optimization: Redemption of open-ended equity fund after one year improves tax efficiency by making the realised capital gains tax-free.

Various Redemption Formalities

To ensure quick and accurate processing of mutual fund redemptions, a few mandatory formalities must be fulfilled in redemption requests:

1. Correct Scheme Name and Folio Number.
2. Redemption Amount in Rupees or Units Required
3. Mode of Choice – Physical or Electronic for Redemption Proceeds
4. Ownership Type Wise Signatures of Unit Holders
5. Current Know Your Customer (KYC) Compliance
6. Furnishing PAN Complete of All Holders
7. Account Number Not Dormant
8. IFS Code and MICR Code for Facilitating Seamless Electronic Payouts

How To Redeem Mutual Funds on Angel One?

1. Go to the Mutual Funds section of the Angel One App. Go to ‘Portfolio’. 
2. Choose the fund that you want to redeem units of.
3. Choose how much money you wish to withdraw from that fund and place the withdrawal order.

Considering Some Factors Before Request Submission

Here are a few vital aspects to evaluate before redeeming mutual fund holdings:

1. Current Quantity of Withdrawal Required – Partial or Full
2. Re-balance the investment horizon according to the original intent
3. Likely Taxation Consequence upon Redemption Now versus Later
4. Performance Trend of the Mutual Fund Scheme in recent times
5. Criticality of Continuation to Reap the Favored Investment Objective
6. The Re-entry Price Point for the Same Redeemed Scheme

Common Mistakes During Redemption

A few frequently made errors while filling mutual funds redemption requests that should be strictly avoided:

1. Wrong Details of the Scheme Name and folio Number Resulting in the Failed Requests
2. Oblivious to Applicable Lock-in Periods Not Yet Expired
3. Error Bank Account Particulars Which is Wrong
4. Redeemed Units Requested MismatchOfActual Units Available For Redemption and Actual Request Amount
5. Not all unitholder signatures are as per the holding mode in redemption form.
6. Ignoring Existing Exit Loads and Taxes in Final Redemption Proceeds Calculations.

Useful Precautions

A few vital precautions worth taking: A few vital precautions worth taking:

1. Review all the information entered on the request form before the final submission.
2. Check the Adequate Quantity of Units for Full Redemption Needs
3. Use System-Generated Acknowledgment Number to Check Processing Status
4. Inform the Mutual Fund Distributor or Relationship Manager about the Redemption Details.
5. Provide the right bank details to allow funds to be credited immediately after redemption.
6. Retain a Copy of the Redemption Request Form.

Timeframe of the Redemption Process 

As per the prescribed guidelines:

• The redemption should be sent within ten working days of receiving a valid redemption request.
• The pay-outs in the case of highly liquid funds like overnight funds and liquid funds are immediate, i.e., within 1-2 working days from receipt of the request in the form duly verified.
• If there is any failure to get the payouts or delays in receiving payment, investors should contact the AMC immediately via the toll-free call centre helpline.

Alternatives to Mutual Fund Redemptions

Some possible alternatives investors might consider fully or partially instead of redeeming holdings:

1. Change Existing Investment to Another Better Performing Scheme in the Same AMC
2. Avail SWP Facility to Fulfill Steady Cash Needs
3. Switch Redemption Requests to an Alternative Direct Scheme with a Lower Expense Ratio
4. Pledge or Encumber Existing Units to avail loans Against Redemption. 

Evaluating Redemption Risks  

Key associated risks involved with mutual fund redemptions: 

1. Triggers Premature Capital Gains Tax Incidence if Units Sold Before Statutory Periods
2. Chance of Exit Fatigue - Exiting Schemes Right Before Potential Turnaround in Performance
3. Over-Redeeming More Than Necessary Could Materially Impact Achieving Original Investment Objective 
4. Large Lumpsum Redemptions May Attract Stringent Exit Loads Below Minimum Investment Horizons
5. Markets May Plunge Immediately After Redemption, Making Re-entries Very Costly Later  

Post Redemption To-Do Checklist

There are a few aspects not to overlook after receiving redemption pay-outs:

1. Intimate Mutual Fund AMC & Advisor on Successful Credit of Amounts
2. Reconcile Bank Statement Entries With Expected Redemption Amounts Carefully.
3. Calculate IRR, Absolute Returns on the Whole Redeemed Investment
4. Evaluate Future Options or Suitable Timing for Re-investing in the Same Mutual Fund Scheme
5. Roll Over Capital Gains to Other Instruments in Line with the Existing Financial Plan.

Conclusion

Ultimately, mutual fund redemptions encompass several considerations, such as the NAV, charges, risks, alternatives and prevailing market conditions before doing so. Carefully check all details provided with the request and keep following up with the payment status until the payment is correctly credited. 

Consult the experts whenever you need clarification on your redemption decisions or the timing. Keep redemption documents secure for tax purposes. Keep track of the performance of redeemed schemes so that re-entry is made at an appropriate time at optimal levels while staying invested for long-term wealth creation needs.

Another aspect or functionality of withdrawals regarding mutual funds is the systematic withdrawal plan (SWP). In the next chapter, we’ll discuss the meaning and process of SWP and how to use this feature to generate some passive income.