Mutual Fund Redemption

What Is Mutual fund Redemption?

Mutual Fund Redemption refers to the method of selling mutual funds back to the mutual fund firm by the owner of the mutual funds. It allows the investors to sell back their shares and get their investment or profits back for their own needs or re-investment into another mutual fund (MF) with higher returns.  

After the request for redemption from a mutual fund investor (MFI), the mutual fund company (MFC) has to pay the proceeds within seven days. The mutual fund company charges these redemptions in the form of an exit load at 1% of the amount withdrawn. It also attracts capital gains taxes per the holding period and the sum received. These factors affect the amount received from the MF redemption.

• Mutual fund redemption means the withdrawal of units of mutual funds to get the profits or principal from the mutual fund by the mutual fund holder. 
• It enables investors to resell their units and receive their initial investment or earnings for their purposes or to participate in a different mutual fund (MF) offering greater returns.
• It may be done via a DEMAT account or the AMC site online and offline or by personally visiting the AMC office to submit the physical application form for redemption.
• If an MF has been held for less than a year, then it attracts an income tax rate, and if held for more than one year, then the MF attracts a long-term capital gains tax of 20% on redemption of MFs.

How Does Mutual Fund Redemption Work?

Mutual fund redemption is a method of getting back the money invested in the mutual fund by withdrawing units from one's mutual fund investment at the rate of net asset value prevalent on the day of withdrawal. Whenever an investor feels that they have reached the desired goal, or require money, or the securities market performs poorly and the mutual fund has higher charges, then they may choose to initiate the process to liquidate their investment and access their funds.

It can be done either by submitting a physical request or digitally online on the website. After that, the MFC acknowledges the request with time-stamped confirmation. If submitted online, then the investor receives the submission confirmation via mobile number and email. For physical submission, the investor receives the time-stamped receipt of the request from the officials at the MFC. 

Companies have various mutual fund redemption cut-off times for processing transactions. Any request for redemption before 3 PM gets processed on the same day. Any request received after 3 PM is processed the next day. After the submission gets accepted, the MF house then processes and confirms the transaction within one working day. Finally, after the successful redemption, MF houses the redemption proceeds in the registered bank account of the mutual fund investor. 

Moreover, the MFC calculates the redemption amount after deducting the capital gains taxes and deduction exit load of 1%. Moreover, before opting for MF redemption, one must keep essential things in mind - Exit Load, Lock-in period, and Holding period for taxation.

Process

To redeem one's mutual fund, one has to follow the below mutual fund redemption process:

• It can be done online or offline.
• For offline mode, investors have to submit the signed request form to an asset management company (AMC).
• Investors have to fill in all the required details like folio number, holder's name, & number of units for redemption.
• Plus, a redemption form also has to be submitted.
• If one wants, an online application can also be submitted for redemption.
• In online mode, investors have to log on to their AMC's MF website, where they have to log in to their MF account using their folio number and PAN card.
• After that, one has to select the scheme. 
• Then, one has to select the number of MF units for redemption.
• Moreover, one can also use their dematerialized (DEMAT) accounts for the same purpose.
• After the submission for redemption has been completed successfully, it usually takes a week to get the proceeds deposited into one's account. 

Taxability

Every mutual redemption comes under the purview of capital gains tax in the USA. Let us see how much the taxability of MF redemption is:

• If one redeems their MF within a year with a profit, it attracts higher capital gains taxes.
• If the MF has been bought using a traditional IRA, then lower capital gains taxes are attracted.
• If the MF has been bought using a Roth IRA, then no capital gains taxes get attracted on redemption after 59.5 years and have stayed invested in the IRA for a minimum of 5 years. 
• If one has held on to an MF for less than a year, then short-term capital gains will be attracted upon its redemption at the rate of regular income tax. 
• If one has held on to an MF for more than a year, long-term capital gains will be attracted upon its redemption at the rate of a federal tax of 20%.

However, one must remember that every dollar of capital loss gets offset by one dollar of capital gain.

Examples

Let us see a few hypothetical and real-world examples to understand the topic better.

Example #1

Suppose Noah has 500 mutual funds of a company, XYZ. It wants to redeem the MF to use for the marriage of its son. Noah only kept it in its holding for 11 months and decided to redeem it. Hence, it made a profit of one thousand dollars on the redemption. After subtracting the regular income tax from the proceeds, it received seven hundred dollars in its bank account as redemption money within mutual fund redemption time.

Example #2 

Suppose Alex has 1000 mutual funds of a company DEF. It wants to redeem the MF to fund its son's education. Alex only kept it in holding for twenty-three months and decided to redeem it. Hence, it made a profit of one thousand dollars on the redemption. After subtracting the 20% as capital gains tax from the proceeds, it received eight thousand dollars in its bank account as redemption money.

Example #3

The problems in Chinese stock markets have caused many mutual funds to close down. Last year, about 240 local mutual funds closed, the highest number in five years. This year, 14 more funds have closed already, and about 24 more are expected to close soon. As the market continues to do poorly and fewer people are investing in mutual funds, there are worries about selling off investments quickly and losing money. This shows the difficulties mutual fund companies are facing because of stricter rules, and the market needs to do better. The main stock index, the CSI 300, dropped by 0.4% this week and by 4.7% for the year, which adds to the challenges faced by the mutual fund industry.

Nicholas Yeo, who oversees China's stock at abrdn, talked about how worried investors are. With people withdrawing money and some investments ending, there's a lot of pressure to sell things quickly. This shows how these factors can influence decisions about redeeming mutual funds, especially when the market is uncertain.

Frequently Asked Questions (FAQs)

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This has been a guide to what is Mutual Fund Redemption. Here, we explain the concept along with its process, taxability, and examples. You may also find some useful articles here -

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