Mutual Fund Redemption : Timeline & Taxation
Mutual fund redemption
is a way to make a graceful exit. If you feel like exiting the mutual
fund scheme, then you can redeem the units you hold. We have covered the
following in this article:
Mutual fund redemption
Mutual fund redemption is
how the investors sell their fund units. However, if there is an exit
load, the investors necessarily pay it to redeem their units.
When investors redeem their branches, they earn taxable capital gains. The
taxability of capital gains depends on the type of fund and the period
of holding. Here, investors should mandatorily consider all the expenses
that they would incur on redeeming their units.
When to exit and redeem a fund
The right time to sell or redeem mutual funds depends
on investors’ financial goals. One might be invested in a mutual fund
for ten to fifteen years to purchase a house or finance their child’s
wedding. In some cases, it could also be a short-term goal, such as
buying a car or an appliance. Once an investor gets close to realising
their financial plan, they should necessarily consider
redeeming their fund units, irrespective of the market state.
How to redeem mutual funds
Once the reason for redemption is apparent and finalised, you can
redeem your mutual fund units through any following methods.
Directly through AMC
If you have invested in a mutual fund directly with the asset management
company (AMC), you can redeem using their online portal. You can
choose to sell some units or all, as per your requirement. One can also
save units offline by visiting the AMC office. After your request is
processed, you will receive the redemption amount via NEFT or through a
cheque sent to the registered address. Usually, the online mode is much
faster, in which the amount gets credited in a day or two.
Through a trading or Demat account
If you bought the mutual funds through a Demat account or trading
account, you would have to redeem your units through the same
account. Once the process is completed, an electronic payout (NEFT or
IMPS) against the redemption request will be made, and the amount will be
credited to the same bank account registered with the Demat account.
Offline through an agent or distributor
Central services such as CAMS and Karvy also provide the facility of
redeeming mutual funds bought from several AMCs. Download a redemption
form, and submit the duly filled and signed form at the nearest CAMS
office.
Why do investors redeem mutual funds?
An investor may have numerous reasons to invest or sell fund units. It
is advised to consider the following aspects before you redeem
impulsively.
If AMC cannot deliver what it promised
Individuals invest in those funds whose objective is in line with
theirs. So, this objective plays a vital role in finalising what funds
you want to include in your investment portfolio. However, an active
investor tracking the market might sell off or redeem units if the
long-term prospects seem negative. However, as per a CRISIL report, the
chances of a fund providing excellent returns increase when invested
with a long-term horizon.
When the markets are thriving
One should not sell just because the markets have touched new highs, and you must not sell just because of the recent market developments that
brought down the NAV of mutual funds. Financial planners believe it is
impossible to time the markets for any investor, and hence, redeeming
immediately after a new market high might not be a good idea.
Scheme not doing well from sometime
If your scheme seems to be underperforming for a while now, then you
should scrutinise the reasons for its under-performance. If the cause
was something like a change in the objectives or a drastic shift in the
portfolio mix (which is not in line with your goals) – then you
might consider fund redemption. However, one should not redeem
considering a fund’s recent performance. Investors should consider
staying invested for as long as possible to reap the maximum returns on
their investment.
Unexpected financial crisis
It is advisable to have some part of one’s portfolio invested in
open-ended mutual funds to avoid unforeseen events. This ensures liquidity.
One should avoid selling off funds that are built to meet a particular
goal. Also, be mindful of the tax implications and exit loads that apply
when redeeming your mutual fund units. One should invest with a longer investment horizon to
reap maximum benefits from flexible funds. The underlying aim of the
investment should always be wealth creation, capital protection, and
appreciation. Do not let any other factors guide the redemption
decisions. In short, one should invest with a longer investment horizon
to reap maximum benefits from flexible funds. Therefore, the underlying
aim of the investment should always be wealth creation, capital
protection and appreciation. Do not let any other factors guide the
redemption decisions. In short, one should invest with a longer investment horizon to
reap maximum benefits from flexible funds. Therefore, the underlying
aim of the investment should always be wealth creation, capital
protection and appreciation. Do not let any other factors guide the
redemption decisions.
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