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Whether you intend to pursue short-term gains or long-term savings, mutual funds are a stable investment option for growing your finances. They offer the advantages of diversification, promising returns, and potential capital growth. They also present relatively lower risk than direct investments in equity markets as market professionals strategically manage your finances to yield favourable results.
However, the need to liquidate mutual funds often arises during emergencies. The process of disinvesting from a mutual fund scheme by selling it is known as mutual fund redemption. In this process, investors can either redeem specific units or opt for a complete exit.
Therefore, it is crucial to understand the intricacies of redeeming your investments to steer away from losses and make informed financial decisions.
Selling mutual funds differs from selling stock shares or exchange-traded funds (ETFs). There are many factors to consider before redeeming your mutual funds:
The redemption process timing depends on the settlement cycle, varying between T+1 and T+7 days (T is the transaction day), excluding weekends. Thus, understanding the settlement cycle before initiating a redemption request is crucial. Moreover, mutual fund units are redeemed based on the Net Asset Value (NAV) as of 3 p.m. If the application is submitted before 3 p.m., the redemption occurs at the day's NAV. Otherwise, it happens at the next day's NAV, potentially affecting the final earnings.
The duration of holding mutual funds significantly impacts overall earnings. Short-term capital gains, applicable for holding periods of less than 12 months in equity funds, incur a tax of approximately 15%, while long-term gains (holding period exceeding 12 months) are tax-free up to INR 1 lakh and taxed at 10% after that. In the case of debt funds, hort-term gains (if sold before three years) are taxed based on the investor's applicable tax rate, whereas long-term gains are taxed at 20% with indexation. Assessing the tax implications before initiating redemption is crucial to grasp the complete picture of potential profits.
Redeeming mutual funds prematurely attracts an exit load, typically 1% to 2%, depending on the fund type. Furthermore, the Ministry of Finance imposes a 0.001% Securities Transaction Tax (STT) for specific funds when buying or selling equity or equity-oriented units. This does not apply to debt funds. Considering these charges is essential in evaluating the overall impact on returns before opting for redemption.
Here is how you can redeem your mutual funds:
Investors opting for offline redemption must complete a redemption request form, filling in all relevant details, such as the holder's name, folio number, and the specific number of units intended for redemption. Signing the form is mandatory, following which the proceeds are swiftly credited to the registered bank account.
The online redemption process involves logging into the preferred mutual fund website using the designated folio number and PAN card. After successful login, investors can choose the desired scheme and specify the number of units or the preferred redemption amount.
The redemption procedure is relatively simple if you have acquired mutual fund units using your demat account. You can log in to your securities account and submit a redemption application. Following the application, the payment is typically processed within a few days and disbursed through the selected mode of payment. Generally, the amount is transferred to the bank account linked to the demat account for convenient access by the investor.
Redemption can be facilitated through multiple avenues, including the asset management company (AMC), authorised agents, or a personal demat account. Notably, most leading AMCs offer a user-friendly online portal, a dedicated mobile application, or personalised support from assigned relationship managers. Through these accessible platforms, investors can seamlessly liquidate a portion or all of their units tailored to their requirements.
While redeeming mutual funds can provide the necessary liquidity, investors must carefully consider factors such as the timing, tax implications, and associated charges. Vigilance in understanding these crucial aspects ensures informed decision-making and guards against potential losses. Maintaining a comprehensive perspective and strategic foresight can optimise your financial gains for secure investments.
At the same time, choosing a trusted financial institution like Tata Capital Wealth to manage your investments can maximise your profits. With a team of seasoned professionals who are well-versed in market dynamics, Tata Capital Wealth is committed to helping you reach your financial goals.
Visit the Tata Capital Wealth website today!
Policies, Codes & Other Documents