Summary
Mutual fund redemption involves withdrawing the invested money through the sale of some or all units of mutual funds.
This process is straightforward; however, the investor must understand the mutual fund redemption process, ways of withdrawal, and conditions associated with them.
Investors must consider various factors before withdrawing their money.
This will make the process free of any charges that may affect future plans for investors financially.
An investor may select full redemption, partial withdrawal, or even an SWP depending on his needs.
This choice helps him to get access to money and at the same time, manage his mutual funds investment.
The process of making withdrawals from a mutual fund is simple, but one needs to be informed about it before withdrawing any units from their investment.
First, the investor must log into his/her mutual fund account via the platform or by logging into the website or investment application of the fund house.
The second step is selecting the mutual fund scheme from the investor’s portfolio and clicking ‘redeem’ or ‘withdraw’.
Third, the investor enters the amount of money or units he/she wishes to withdraw. However, it is important to first check the relevant NAV, exit loads, taxes and lock-in period.
After the verification of the information provided, the investor confirms the request. Once the request is confirmed, the investor receives his redemption amount in the respective bank account within the specified period of time.
What does redemption in mutual funds mean?
Mutual funds redemption means that the investor sells his units and gets back the money he invested. The process starts when an individual buys a number of units of a particular mutual fund at its Net Asset Value (NAV). The fund then calculates the redemption value of his units based on the applicable NAV at which an open-ended scheme purchases or redeems its units from the unitholders, and credits the amount to his bank account after applicable deductions.
Investors may have two options for their mutual fund redemption, namely full redemption and partial redemption. In full redemption, all units are redeemed; in the latter case, the investor sells only a few units.
However, before deciding to withdraw funds, the investor should consider the exit load, taxes, lock-in period, and investment objective.
Types of mutual fund withdrawals
There are several types of withdrawals that can be made from a mutual fund, depending on the need for the money.
| Type of Mutual Fund withdrawal | Explanation |
| Open-ended fund withdrawal | Investors can redeem units on business days, subject to the scheme terms and applicable exit load |
| Close-ended Fund withdrawal | Units generally cannot be redeemed directly from the fund before maturity, although they may be traded on a stock exchange if listed |
| ELSS Withdrawal | ELSS Investments have a three year lock in period, so units generally cannot be redeemed before completing the applicable lock-in |
| Interval fund Withdrawal | Redemption is allowed only during specified intervals or periods mentioned in the scheme documents |
Step-by-step process to withdraw money online
The procedure of withdrawing money from a mutual fund through the online medium is rather simple.
- Step 1: Firstly, the individual would need to log in to the online portal of the concerned fund house, which is handling his/her mutual fund investments. There could be other authorised investment portals also.
- Step 2: After logging in, you need to go to the portfolio section of the investment portal and select the mutual fund scheme from which money is being withdrawn. Then look out for options like ‘redeem’, ‘withdraw’, or ‘sell’. The person may be asked to input whether he/she wants to withdraw the money or mutual fund units.
- Step 3: Review all the important details related to the transaction, such as the number of units, redemption amount, exit loads, and so on, before initiating it. It should be checked whether there is a tax liability on the transaction.
- Step 4: Initiate the process after verifying all the above points. The redemption amount would be deposited in the person’s linked bank account in 1-3 days, and for overseas investments, it is 5 days after the transaction gets processed.
Can you withdraw mutual funds anytime?
For most open-ended mutual funds, withdrawals are processed on working days. However, the ability to withdraw immediately will depend on the type of mutual fund and scheme rules. There are some mutual funds that can have an exit load when units are withdrawn within a specific period of time.
There are mutual funds and investment schemes that have a lock-in period. For example, some mutual funds include Equity Linked Savings Scheme (ELSS). The lock-in period for ELSS mutual funds is three years. This means you cannot withdraw ELSS units before the lock-in period expires.
The money you receive may be different from the value during withdrawal for different reasons, including the rules of NAV and cut-off for transactions.
You should not make an assumption that all mutual funds allow withdrawal without restrictions. You need to consider the scheme, exit load, lock-in period, NAV rules, and settlement time.
Tax implications and exit load explained
Tax and exit load are two critical considerations in withdrawing funds from mutual funds. Exit load refers to the fee charged by certain mutual funds when investors withdraw their units within a given period. The amount of the fee and its conditions differ from one mutual fund to another. All mutual funds may not impose an exit load.
Assume that ABC Mutual Fund levies an exit load of 0.25% if the units are sold within the designated period, whereas XYZ Mutual Fund does not charge any exit load. In case you sell ₹1,00,000 worth of units of ABC Mutual Fund with 0.25% exit load, ₹250 will be charged as exit load, thereby giving you ₹99,750, excluding tax considerations. On the other hand, when you sell ₹1,00,000 worth of units of XYZ Mutual Fund without exit load, there will be no exit load deduction.
Tax implications
The tax treatment depends on the type of mutual fund, date of acquisition, holding period, and applicable tax provisions.
| Mutual Fund category | Short-term capital gains | Long-term capital gains |
| Equity-oriented Funds | Generally 20% if units are held up to 12 months, subject to applicable conditions | 12.5% on LTCG, exceeding to ₹1.25 Lakh in a financial year |
| Specified Mutual Funds | Gains from specified mutual funds units acquired on or after 1 April 2023 are treated as short term capital gains, irrespective of the holding period, and are taxed at the investor’s applicable slab rate | No separate LTCG treatment for such units acquired on or after 1 April 2023 because the gains are treated as STCG |
| Other Non-equity Funds | Short-term gains are generally taxed at the investor’s applicable income tax slab rate, subject to the specific nature and acquisition date of the investment | For units that qualify for long-term investment, LTCG is generally taxed at 12.5% without indexation, exceeding ₹1.25 Lakh (Plus surcharge and Health & education cess) |
Things to consider before withdrawing mutual funds
In order to withdraw funds from a mutual fund investment,
- The investor must first understand the reason behind his/her need for the money. In case the need is due to an important financial obligation, then it might be necessary to make redemptions. But selling your investments just because there has been a fall in the market is something which cannot always be justified by long-term investors.
- It is also advisable to check the objective of your investment. If the mutual fund was chosen as an investment vehicle for a long-term goal such as retirement or for education purposes, then the amount that you need can come through some other source rather than early redemption.
- The amount needed is another important point. In case you need a smaller amount, then rather than selling all your investment, partial redemptions will be more appropriate for you.
- Moreover, you must also check the exit load and tax implications before finalising your transaction. The portfolio of the investor is another aspect that he/she needs to take care of while selling an investment.
Common mistakes to avoid
Before withdrawing from a mutual fund, investors should avoid common mistakes that can increase costs or affect their financial goals.
- Exit Load: One of the most common mistakes made by investors is redeeming mutual funds without verifying the applicable exit load.
- Taxes: It is also essential to consider potential taxes in the case of a profit-making redemption. Depending on the type of the fund and applicable tax laws, such a redemption can result in capital gains tax. Thus, before computing the actual payout, investors should take this into consideration.
- Cancellation of SIP: Withdrawing money and cancelling SIP, thinking that withdrawal will also cancel the investments, is one more common misconception. Cancellation of SIP does not affect existing investments; they stay invested until the separate redemption is performed.
- Short-term volatility: Additionally, it is important to remember that there is no reason to withdraw due to short-term market volatility. The mutual funds, especially equity funds, usually have the investment horizon in mind.
Tools and platforms to redeem mutual funds
- Redeem mutual funds via Demat account
For redeeming mutual funds through Demat account, one needs to go through the platform where they have invested in the first place. The platforms that can be used for the purpose depend on the mode of investing in mutual funds. These platforms can include the website or app of the mutual fund company, a registered investment platform, or the mutual fund transaction platform.
- Redeem directly through AMC
If any investor invested in a mutual fund directly with the Asset management company(AMC), then you can redeem using their online portal, the investor can either opt to sell some units as per your needs. After your request is processed, funds will be credited to your bank account.
- Redeem through offline agent or distributor
Central registry service providers like CAMS and Karvy also provide the facility of redeeming mutual funds bought from several MNCs. You need to download the redemption form and submit the signed form with the folio details at the nearest CAMS or Karvy office. After submitting, and processing of the file, you can get the refunds in your account.
Alternatives to withdrawing mutual funds
If you need money but do not want to completely exit your mutual fund investment, there are several alternatives to consider.
- Partial Redemption: A full withdrawal might not always be a single alternative for raising money, as per the requirement. You might also choose partial redemption based on your financial needs. In this strategy, you might sell off sufficient units to meet your requirement while keeping the other units in investment.
- Systematic Withdrawal Plan (SWP): It is another option that investors might consider. Through this strategy, investors can withdraw a certain amount of money from their mutual fund investments at a regular interval. This would be helpful for those investors who desire cash flow rather than complete withdrawal of their investments.
- An emergency fund: It can be used by investors to cover emergency expenses. Keeping a separate savings account for such emergencies would prevent investors from withdrawing their investments unnecessarily.
Final thoughts
Withdrawal of money from mutual funds is a simple process. In case a smaller sum of money is required, partial withdrawal can assist in achieving the objective without withdrawing completely from the investment. Those who require a constant flow of cash can also think of initiating an SWP according to their circumstances.
Similarly, it is important that you reconsider your original motive of investing in a particular mutual fund. Mutual funds that have been chosen for fulfilling a long-term objective might not prove useful if frequent withdrawals are planned.
FAQs
You need to log into your mutual fund’s website, click on your portfolio page, choose the mutual fund you want to withdraw, click on the redemption option, enter the amount or units, pay attention to the fees and taxes, and then confirm your request. The money will be directly credited to your bank account.
The time duration will depend on the type of mutual fund and the process involved in making the transaction. There could be a different time duration for liquid and debt funds compared to equity funds. You may check your estimated crediting date by placing your request from your platform or fund house.
There could be an exit load applicable to the scheme in case your fund has such a provision. Apart from that, there could also be a lock-in period for some investment plans. In addition, it may result in capital gain tax liability on selling the units at a profit.
It is usually possible to redeem units that have already been bought under an SIP based on the terms of the scheme, lock-in period and exit load applicable. But stopping an SIP only stops future instalments; it does not automatically withdraw your existing investment.
The best way to withdraw mutual funds is by redemption through the authorised platform. Before confirming the transaction, cross-check the scheme, units, bank details, exit load and taxation, if any applicable.
No, an SWP is not 100% safe because the money continues to come from your mutual fund investment, whose value can rise or fall with market conditions. If withdrawals are too high relative to the investment’s returns, your capital can be reduced over time.
