Mutual Fund Redemption: All you need to know

Selling mutual Funds
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When an investor exits from his/her mutual fund investment or sells mutual fund units, wholly or partly, it is known as mutual fund redemption. You can redeem mutual fund units when you feel the need to exit for some reasons. 

What Happens During Mutual Fund Redemption?

Mutual fund redemption allows investors to earn capital gains. The capital gains can be classified into two categories- Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) and are taxed accordingly. The taxation also depends on the type of fund, i.e. the meaning of STCG and LTCG is different for equity mutual funds and debt funds, as are the tax provisions. While exiting from a mutual fund, the investor also might have to pay an exit load along with other charges. Hence, it is necessary to consider the tax implications and the expenses that will be incurred while redeeming mutual fund units.

Tax on Mutual Fund Redemption

When mutual fund units are sold at a price higher than their purchase price, the investor earns capital gains, which are taxed according to the laid tax provisions. As said, there are two types of capital gains- STCG and LTCG. Besides, there are different types of mutual fund schemes available in the market. So let us learn about how capital gains from different mutual fund schemes are taxed. 

Definition of Capital Gains in Different Types of Mutual Funds 

Equity Mutual Funds

Short Term Capital Gains (STCG): If the holding period is less than 12 months

Long Term Capital Gains (LTCG): If the holding period is equal to or more than 12 months.

Debt Funds

Short Term Capital Gains (STCG): If the holding period is less than 36 months

Long Term Capital Gains (LTCG): If the holding period is equal to or more than 36 months.

Hybrid Equity Mutual Funds

Short Term Capital Gains (STCG): If the holding period is less than 12 months

Long Term Capital Gains (LTCG): If the holding period is equal to or more than 12 months.

Hybrid Debt Mutual Funds

Short Term Capital Gains (STCG): If the holding period is less than 36 months

Long Term Capital Gains (LTCG): If the holding period is equal to or more than 36 months.

Taxation According on Different Mutual Funds According to Capital Gains

Type of FundSTCGLTCG
Equity Mutual Funds15% of the total gain along with cess and surchargeNo tax on gains up to Rs 1 lakh. Gains above Rs 1 lakh are taxed at 10% along with cess and surcharge
Debt FundsTaxed as per investor’s net annual income tax slab20% of the total gains along with cess and surcharge
Hybrid Equity Funds15% of the total gain along with cess and surchargeNo tax on gains up to Rs 1 lakh. Gains above Rs 1 lakh are taxed at 10% along with cess and surcharge
Hybrid Debt FundsTaxed as per investor’s net annual income tax slab20% of the total gains along with cess and surcharge

Cost of Mutual Fund Redemption

  • Exit Load in Mutual Fund Redemption: Exit load is the fee that the fund houses charge from investors when they redeem in mutual funds. It is usually denoted as a percentage of the Net Asset Value (NAV) of the total units held by the investor. Moreover, exit load is generally charged for a specific time period, i.e; only when the investor makes an early exit. For example, the ICICI Prudential Technology Fund Direct Growth has an exit loan of 1% if the mutual fund units are redeemed within 15 days, which means if the units are redeemed after being held for 15 days, there will be no exit load charged on the gains.
  • Total Expense Ratio in Mutual Funds: Expense ratio is the annual fee that the asset management company charges from the investor. Just like exit load, expense ratio is also defined in percentage. The fee is charged to cover the expenses incurred in the management of the fund such as asset manager’s salary, cost of advertising the fund, paperwork involved, buying and selling charges of the holdings, etc. The SEBI has set a maximum limit of 2.25% for the Total Expense Ratio (TER) that can be charged by fund houses.

How to Redeem Mutual Funds Online?

There are many online platforms that allow you to invest in mutual funds easily. You can redeem the units of the fund through the same platform. It is as simple as buying and selling. 

  1. Open the app/online portal of the AMC/investing platform
  2. Go to the mutual fund section and select the fund you want to redeem
  3. Click on redeem/sell/exit fund 
  4. Enter the amount/number of units you wish to redeem
  5. Submit the request
  6. The final return will be calculated after deducting the charges/fee
  7. The amount will be credited to the registered bank account within a few days

When to Redeem Mutual Fund?

There can be a number of reasons to redeem mutual fund. There is no fixed rule to exit from a mutual fund, the decision varies from investor to investor. However, considering the below mentioned factors can help you make a wise decision on when you should sell your mutual fund units.

Market Factors

Investing in mutual funds is not the same as investing in equities and other instruments. Daily market highs/lows should not be a factor in redeeming the mutual fund investments. The fund manager actively manages the funds and always targets to earn higher than the average market returns. For example, when the price of the equity holdings of your fund has increased substantially on a day, you might see 1-2% return on a single day. If you have invested a lump sum amount of Rs 1 lakh, 1-2% will translate into Rs 10,000 - 20,000. However, redeeming the units based on daily returns will not be a sound decision, atleast in case of mutual funds. You should remain invested in the fund for a longer period of time to earn even higher returns.

Performance of the Holdings

Suppose you have invested in a mutual fund scheme that targets banking stocks. However, the very next day you get news that the central bank has increased the repo rate, which is going to have adverse negative effects on the bank stocks, while at the same time there is positive news from the IT sector. In that case, you can choose to exit from the current mutual fund and invest in the IT-heavy fund. However, keep the exit load and other costs in mind while redeeming the units. If any news is going to have a long term negative impact on your investments, exiting from the fund can prove to be a wise choice.

Unexpected Financial Emergency

Mutual funds also work as a great alternative to saving schemes. The money invested in mutual funds can help you to deal with any financial emergency. In case you get an urgent medical expense, need funds to travel somewhere, etc., you should withdraw the needed amount from the mutual fund to meet up the unexpected expenses. Mutual funds are going nowhere. Overcoming a financial crisis will give you a fresh opportunity to start your mutual fund investment journey again.

Mutual funds are one of safest and high return giving investment instruments. Redeeming a mutual fund scheme is effortless. However, you should have a proper knowledge on when, why, and other factors that are involved in exiting from a mutual fund scheme.

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