Every mutual fund investor would like to redeem his/her investment at some point such that they can get back the capital investment and profits along with. Redemption is therefore a way to exit a mutual fund investment. Mutual fund investors can exit a fund investment by redeeming the units purchased.
While the mutual fund redemption process has largely been simplified since it can be done online, there are certain rules to be followed. These are implemented by the Securities and Exchange Board of India (SEBI) and Income Tax Department and can have an impact on a mutual fund investment.
By learning about these rules, mutual fund investors can ensure the right timing of application and redemption to maximise their return on investment. Here’s a look at the redemption payout timelines to be followed and other aspects that mutual fund investors need to know about redemption.
NAV cut-off timings for subscription and redemption
As per SEBI’s latest circular, the NAV applicable on the purchase or redemption of mutual fund units will have to be determined as per the cut-off timings stated in the circular. This rule has come into effect starting from February 1, 2021.
The table below shows the details of these new cut-off timings, as prescribed by SEBI, to be followed for determining the Net Asset Value (NAV) during subscription and redemption of mutual fund units:
| Scheme | Transaction type | Cut-off timings |
| Liquid &Overnight funds | Subscription (also includes switch from other schemes) | 1:30 p.m. |
| Redemption (also includes switch from other schemes) | 3:00 p.m. | |
| All other schemes | Subscription (also includes switch from other schemes) | 3:00 p.m. |
| Redemption (also includes switch from other schemes) | 3:00 p.m. |
Once the redemption process is complete, funds are transferred to the investor’s registered bank account within 3 business days.
How do the mutual fund cut-off timings actually work
Here is an example to understand how the cut-off timings will impact a mutual fund investment transaction:
Suppose an investor wants to purchase equity mutual fund units on 26th August 2022.
If the investor transfers funds such that the fund house receives the amount in its account before the cut-off time of 3.00 p.m. on 26th August 2022, he/she will be allotted units as per the closing NAV of 26-Aug-2022.
If the funds are credited to the fund house’s bank account at 5.00 p.m. on 26th Aug 2022, which is after the cut-off time of 3.00 p.m., the units will be allotted as per the NAV of Monday 29-Aug-2022.
Similarly, depending on whether the redemption application is made before or after the cut-off time, the NAV will be applied accordingly.
When should investors redeem mutual fund units?
For any mutual fund investor, the right time to redeem the fund units will depend on personal financial goals and preferences. While investing in a mutual fund, an investor may have estimated a certain time horizon for which he/she will stay invested in it, suppose 3-5 years or even 10-15 years. Many investors may have invested in a fund to meet certain short-term financial goals, like buying an appliance or a car. Therefore, when an investor reaches the point of realising the pre-determined financial goal, he/she can opt for the redemption of fund units.
Did you know
If an investor has invested in an ELSS or equity-linked saving scheme, he/she cannot redeem the fund units until the mandatory lock-in period of three years is completed.
What is the process to redeem mutual fund units?
To redeem mutual fund units, an investor can follow any of the below-mentioned modes:
- Using online trading or Demat account
Investors who may have bought their mutual funds online can redeem them through their Demat or trading account. This process is very easy and once complete, the investor receives an electronic payout (through NEFT or IMPS) toward the redemption request. The amount is credited to the investor’s bank account that was registered against the Demat account.
- By contacting fund house
Many investors prefer to directly invest in schemes through the mutual fund house or AMC. In such cases, one can redeem the fund units through the AMC’s online portal. Once such a request is submitted and processed, the investor receives the credit through NEFT or a physical cheque will be delivered to the investor’s registered address. Since the online mode is quick and easy, very few investors prefer to visit the AMC offices for unit redemption.
- By contacting agent or broker
Investors can also contact their broker or agent for mutual fund unit redemption.
Conclusion
Investors must check the NAV at redemption to ensure that the AMC is following the revised SEBI guidelines for cut-off timings. Equity fund redemption takes the longest of around 3-4 working days. If redeeming liquid funds, investors can expect a redemption timeline of around 1-2 working days and for debt funds, the redemption period ranges between 2-3 working days.
FAQs
Yes, the day and time of mutual fund unit redemption are crucial since it will impact the NAV and therefore, the capital gains that one can earn from the same. This will also impact the settlement timelines.
The holding period of any mutual fund investment is crucial in determining the capital gains that an investor earns from the investment. This also depends on the type of scheme that one has invested in and the financial goals to be achieved. The holding period will also determine tax applicability, whether the short-term or long-term tax will have to be paid.
Yes, mutual fund schemes have different exit loads or charges that are applicable at redemption. There are certain conditions based on which the exit load is applied. For instance, if an equity fund is redeemed within a year of investment, it may attract around 1% as exit charges.
No, the cut-off timings are not meant for restricting investor entry/exit from mutual funds. These are essentially meant for determining the applicable NAV while buying or selling mutual fund units.
