Over the past few years, the Indian equity market has undergone significant growth and changes; Mutual Funds have been the most preferred investment option amongst investors compared to other traditional instruments.

According to AMFI data, the Average AUM of the Indian Mutual Fund Industry has grown substantially from Rs 8.11 trillion as on June 30, 2013, to Rs 44.39 trillion as on June 30, 2023, a more than 5 fold increase in a span of 10 years. The total number of accounts (or folios as per mutual fund parlance) as on June 30, 2023, stood at 14.91 crore (149.1 million), while the number of folios under Equity, Hybrid and Solution Oriented Schemes, wherein the maximum investment is from retail segment stood at about 11.91 crore (119.1 million). This shows the escalation of investor sentiment towards investment in Mutual Funds.

Although there is a level of awareness amongst investors about investment in mutual funds, the advancement in technology makes many investors, especially non-tech-savvy investors, wonder how to invest in mutual funds online. Well, our previous article – How to Invest in Mutual Funds covered by Rounaq Neroy, explains in detail;

  • The process of investing in mutual funds (online and offline)
  • The parameter to look at to select the best mutual funds
  • The strategy to follow when investing in mutual funds

[Read: 7 Top Performing Mutual Funds Based on 10-Year SIP Returns]

Mutual Funds are considered one of the best market-linked investments to achieve short-term and long-term financial goals such as retirement planning, children’s education, marriage, or establishing a passive revenue source. However, understanding the process of mutual fund redemption is just as vital as investing in them.

Now, out of the several advantages of investing in mutual funds, one of the major advantages is the easy liquidity that they offer. Sometimes, investors need to liquidate mutual fund holdings, and this process of exiting from the mutual fund scheme is called mutual fund redemption.

Redeeming Mutual Funds

Mutual Fund redemption is a process wherein an investor sells their mutual fund units back to the mutual fund house (AMC). Redemption is nothing but a process of withdrawing units from your mutual fund investments and getting the money back from your investment at the Net Asset Value (NAV) prevailing on the day of redemption.

Selling mutual funds follow a different model compared to selling shares or stocks. Mutual Fund houses usually keep cash reserves to cover investor redemptions, so they aren’t forced to liquidate any portfolio holdings at inopportune times. Redeeming mutual funds is essential and should be approached with caution. Let us understand more about this…

In this article, we will walk you through the process of selling your mutual funds online, when is the right time to sell your mutual funds and the tax implications applicable on the redemption of mutual funds.

What is the process of selling mutual funds online?

Mutual Fund products essentially come with exit options such as – voluntary exit at any time during the term of the fund or redemption upon maturity or after lock-in. A voluntary exit (before or after lock-in) may or may not have an exit load attached.

Yes, investors are levied exit load if they opt to redeem mutual fund units before a specific period. Calculated in percentage, this is the charge that the investors have to bear for redeeming the mutual fund before its maturity. Exit load usually range from 1% to 2% of the total amount withdrawn. Exit load varies for equity mutual funds and debt mutual funds and is different for short and ultra-short funds.

Given that, the redemption of mutual funds can be done via online or offline methods. It is as simple as clicking on a button if done online. It can also be done offline by physically applying for redemption. Depending on the investor’s requirements, partial or complete mutual fund redemption may be done. Investors can either choose to redeem specific units or can exit the mutual fund scheme entirely.

Offline Method

In order to redeem funds through offline mode, investors need to submit a duly signed redemption request form to the respective fund house/AMCs or the Registrar’s designated office. Investors need to duly fill in all the details, including holder’s name, folio number, and number of units to redeem and sign the redemption form. The proceeds from the redemption will be credited to the registered bank account of the mutual fund holder.

Apart from this, you can also redeem mutual funds offline through a third party like an agent or mutual fund distributor. They can submit the duly signed redemption form to the distributor, who in turn can submit it to the AMC office or the RTA office. Keep in mind that they may typically charge a fee for their services.

Online Method

Redeeming mutual funds online has become an increasingly popular option for investors. There are different ways to redeem a mutual fund – through an Asset Management Company (AMC), an agent or directly through your personal Demat account.

  • Redemption through AMCMost AMCs have a dedicated web portal, mobile application, and relationship manager for their investors. If you have purchased your mutual fund units through an AMC, you can simply log in to the portal/app and select the mutual fund and the units you want to redeem. You can choose to sell some units or all. After reviewing all the details, submit your redemption request. The fund house will credit the redemption amount to your bank account via electronic transfer. If the investor does not provide their bank details, then the AMC can send an account payee cheque through courier to your registered address. Online redemptions are typically faster, with the amount being credited within a day or two.
  • Redemption through DematIf you have purchased your mutual fund units through your personal Demat account, the process here is straightforward. Investors can simply log in to a securities account through the Internet (or through the bank or financial institution’s mobile application) and make a request for redemption. Once the redemption process is completed, the amount is reflected in the bank account registered in the scheme folio through electronic payout. Here the process is completely online.
  • Redemption through an Agent or DistributorAn investor can choose to redeem their mutual funds online through a third party. Many mutual fund distributors offer their investors a web portal/mobile app for mutual fund transactions. Investors associated with such third party can simply redeem their mutual fund units; however, there may be some charges involved for their services.In this day and age of technology, various other fintech investment platforms are also available to perform mutual funds-related transactions online. With this, many investors may consider redeeming their mutual funds units on their fingertips hassle-free.Now that we have discussed how to redeem mutual funds online, the most important question before redeeming a mutual fund is whether you really need the money for a purpose or just booking profit?

Should investors sell mutual funds at market high?

The month of June 2023 presented a blockbuster rally in the Indian stock market that led both the NIFTY 50 and S&P BSE Sensex to climb to their all-time highs. These benchmark indices also continued their upward movement this month; on July 20, the S&P BSE Sensex scaled at 67,571, setting a fresh record high, while the Nifty 50 closed at 19,979. Thanks to the sustained FIIs and optimism in the global markets.

[Read: Sensex at All-time High: Is It Time to Sell Your Equity Mutual Funds?]

Given that major indices reached their lifetime highs in July 2023, the Indian stock market has remained strongly positive. As the markets are dealing with all-time highs, many investors are now wondering if they should hold on to their position or book profits in equities and move out. Sometimes, investors decide to redeem their mutual funds depending on the current sentiment in the market.

Although buying low and selling high is traditional wisdom in investing, the strategy is more suited for stock traders; mutual fund investors are not the best candidates for this. It’s essential to evaluate each situation carefully and consider consulting with a SEBI-registered investment advisor before making any decisions.

Investors may consider selling their mutual funds for the following reasons:

1. Unexpected Financial Crisis

It is one of the most common reasons as to why investors feel the need to redeem their mutual fund investments. In case of a financial emergency or an unexpected rise in major expenses, investors may consider selling/redeeming their mutual fund units. However, selling mutual funds should be seen as a last resort. To avoid liquidation of your mutual funds, investors may maintain a contingency fund that provides a financial safety net to sustain any exigencies.

2. Nearing Your Financial Goal

It is appropriate to progressively reduce mutual fund allocations and switch to less risky investments, such as low-risk debt mutual funds and/or bank deposits if the goal for which investors have invested is approaching or is just a few years away. By doing this, the corpus will be shielded from any potential abrupt correction at the end of the goal period. Investors who have been making regular investments through market highs and lows have probably acquired a sizable sum over a period and reached the required amount for their goals. Such investors may consider booking profits to protect the capital from market uncertainties and volatility.

3. Change in Investment Strategy

Due to changes in an investor’s personal circumstances, market trends and deviation in the investment portfolio, there could be a need to change the investing approach. Investors may sell mutual fund units from one scheme and invest in new funds that are more consistent with the new investment strategy.

[Read: How a Sound Investment Strategy Can Help You Mitigate the Impact of Market Volatility]

The essential characteristics of a mutual fund scheme may also alter, for example, if the AMC changes its control, the scheme’s investing philosophy, strategy, or style, or if it changes its category. Such modifications may cause the scheme to adopt a conservative or aggressive strategy and may no longer be consistent with the investor’s risk tolerance and investing goals. Investors may think about selling their mutual fund units in such a situation and switching to a plan that fits their investing goals.

4. Consistent Underperformance

An investor must keep a close watch on their portfolio with periodic reviews to track the success of their investments. If you identify that a particular fund or funds have been underperforming for a while, the investor can choose to redeem the funds as they are derailing the portfolio performance or not fulfilling your expectations for growth.

Though the ideal situation is to remain invested for a long time period to reap maximum benefits from mutual fund investments, however, if any scheme shows consistent underperformance compared to its peers and the benchmark across various market phases, then it may be time to redeem it and replace it with a better alternative. Do note that underperformance in the short term should not be a reason to sell a mutual fund scheme, as the performance may improve in the future.

As we have consistently stated, trying to time the market is pointless since there is no reliable method to tell when a decline has ended or when a high has been reached. As a result, there is a chance that investors’ bets won’t turn out as they had hoped. Instead of selling during a market high, one should do so after reaching their intended financial goal. Even while it may seem profitable to register profits now, doing so isn’t necessarily advisable or practical in the long run. In order to reach a goal, one must be patient with the money they have invested and focus on their time in the market. Consequently, investors with a long-term approach should not be affected by market peaks and troughs.

[Read: The Investment Strategy Mutual Fund Investors May Follow as Sensex, Nifty Touch Record Highs ]

However, when deciding whether to sell your mutual funds, it’s important to be aware of the associated costs. While redeeming mutual funds is a simple process, there are a few things which investors must keep in mind:

  • Time Required to Process RedemptionEvery type of mutual fund has a separate settlement period, ranging from T+1 to T+7 days. Weekends are not included in these days; they are only business days. As a result, before submitting a request for the redemption of mutual fund units, the investor must be aware of the settlement cycle.
  • Tax ImplicationsSelling assets, including mutual funds, can trigger capital gains taxes on the earnings you have made. Returns on mutual funds are liable to capital gains taxes depending on the amount and the period of holding. This capital gains tax can significantly impact the final earnings in hand.

[Read: Earned Capital Gains in FY 2022-23? Here’s the ITR Form Which Salaried Individuals Must Use]

The time frame for which mutual funds are held is an important factor in your overall earnings. For instance, with equity-oriented mutual funds, if you withdraw your investments within 1 year of purchasing, the profits generated will be subject to short-term capital gains tax at 15%. In the case of long-term gains beyond Rs. 1 Lakh, the tax rate is 10%. In the case of debt funds, short-term gains will be added to your annual income and taxed as per the applicable income tax slab rate, whereas long-term gains are taxed at 20% (w.e.f April 01, 2023).

[Read:  Indexation Benefits on Debt Mutual Funds Removed: A Strategy to Manage Your Debt Allocation]

In some cases, mutual fund schemes are also subject to a lock-in period. This means you may not be able to withdraw the investment during this period, but any gains may be subject to an additional tax rate.

To summarise…

Mutual Funds investors may need to exit their mutual fund investment at some point in time, either to redeem their profits or to reallocate their investments. However, it’s important to consider that mutual funds can generate positive returns over the long term. Before making a decision, carefully weigh the advantages and disadvantages of selling to ensure it aligns with your financial goals.

This article first appeared on PersonalFN here

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