Steps on How to Redeem Mutual Funds

Just like you want to monetize your assets at some point to raise money, you also need to redeem your mutual funds. You may not do it in the short term, but in the medium to long term you would still need to redeem your mutual funds. What does redemption mean? It is nothing but selling the mutual funds you have bought. In the old days, there was only one way to redeem mutual funds and that is by going to the AMC or its registrars and exiting the fund. However, today, there are multiple methods like the traditional AMC route, the stock exchange route, the broker route, the aggregator route etc. You as an investor can adopt any of the routes that best suits your needs to redeem mutual funds.

Let us quickly look at the triggers for people to redeem mutual funds. There could be several reasons. Some cold be profit driven, some could be need driven, some could be goal driven and some could be performance driven. Let us look at some of the key drivers of mutual fund redemption.

Why investors redeem mutual fund

An investor may have numerous reasons to invest or sell fund units. It is advised to consider the following aspects before you redeem impulsively.

1. The redemption of mutual funds can be goal based. For example, you may have bought a debt fund for 5 years so as to be able to save enough to pay margin for your home loan. At the completion of 5 years, the redemption is a goal based redemption. Similarly, you may have invested in an equity fund for 15 years to give your daughter a solid higher education. Now, that your daughter is applying for admissions, it is time to redeem the funds and keep the corpus ready. These are examples of goal based redemptions.

2. The second trigger for redemption is performance based. This can happen on two fronts. Firstly, the AMC that you are invested in may be continuously underperforming the peer group and the index. Such consistent underperformance can be a trigger for redemption. Secondly, your funds may be too heavy on financials and you may be sceptical about financials due to the rising interest rate scenario. In this case, the performance concerns are not about AMC or specific fund performance but about theme or exposure performance.

3. The third trigger for redemption is returns driven. For instance, you got into a pharma fund and that fund has earned 70% in a little over a year. What should you do? The basic rule is that if something is too good to be true then it is probably not true. The best thing you can do in such circumstances is to redeem and walk out and take the profits off the table. Here you are just making the best of the new highs made by the market overall or of the sectors that have done exceedingly well.

4. Redemption can be personal finance driven. For instance, you may be facing a financial crisis and you may have exhausted all other sources of funds. The best option for you is to partially redeem your mutual funds. That may not sound like a great idea because it impairs your journey towards your goals. But in a crisis, you don’t have much of a choice and you need to fall back upon your savings.

5. The last trigger for redeeming mutual funds is the allocation trigger. What does this mean. For example, you started off with the asset allocation of 70% in equity and 30% I debt. You have given yourself a leeway of 5% for movement either ways. However, due to the sharp spike in equity markets, the equity allocation in value terms has gone up to 86%. Now that is a huge digression from the original allocation. The best you can do is to redeem your equity funds and buy fresh units of debt fund or liquid funds or even debt oriented hybrid funds.

Finer points in mutual fund redemption

Mutual fund redemption is all about selling mutual fund units, be it in debt or equity funds. There are two things you must know about redemptions. Firstly, when you redeem equity funds, Securities Transaction Tax (STT). In the case of redemption of equity mutual funds, the STT is levied at the rate of 0.001% on the value of the redemption. STT is not applicable for buying equity funds nor is it applicable in the case of non-equity funds.

Then there is the exit load that is levied on the mutual fund. Normally, liquid funds do not carry exit load but other funds carry exit load if the fund is redeemed before a stipulated period of 6 months or 1 year. The rate of exit load can vary from one fund to another and that also reduces the redemption value. Similarly, the applicable taxes on short term or long term gains also reduce your net profit after tax.

The right time to sell or redeem mutual funds depends on the financial goals of the investor. The best time to redeem funds is when the goals reach expiration date. However, real life is always not that simple and there may be many other compulsions like financial constraints, underperformance of the theme or scheme, allocation mismatch with the original plan etc.

How to actually redeem mutual funds (the process)

Once the decision to redeem the fund has been taken, the next step is to actually redeem the fund. Today, there are several options to redeem mutual funds. You can decide which is the best option for you.

Option 1: Redeem directly through AMC

If you have invested in a mutual fund directly with the asset management company (AMC), then you can redeem using their online portal. You can either opt to sell some units or all units as per your needs. Such redemption of units can also be done offline by visiting the AMC office or the office of the registrar to the fund like CAMS or Karvy. After your request is processed, you get an SMS acknowledgement the next day. In case your online banking mandate is registered, then the amount is directly credited to your bank account. Else, the cheque for the redemption amount is mailed directly to your address.

Option 2: Redeem mutual funds via trading or Demat account

This is a brand new option that is available to investors in mutual funds. For instance, had you bought the mutual fund units through your Demat account or trading account, then you will have to redeem your units through the same account. Once the process is completed, an electronic pay-out (NEFT or IMPS) against the redemption request will be made. The amount will be credited to the same bank account that is mapped to the Demat account.

Option 3: Redeem offline through agent or distributor

This is an additional option available to the investor. Central registry service providers like CAMS and Karvy also provide the facility of redeeming mutual funds bought from several AMCs. You need to download a redemption form and submit the duly filled and signed form with the folio details at the nearest CAMS or Karvy office. Quite often, your broker will also help you to redeem funds.