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How to withdraw or redeem money from mutual funds?

  • Akshatha Sajumon
  • 06 Apr
  • 6 minutes

 

One of the major advantages of investing in mutual funds is the easy liquidity they offer. Redeeming mutual fund schemes is as simple as clicking on a button if done online or physically applying for a redemption. Even though redeeming mutual fund investments is straightforward, there are some aspects that you must keep in mind to ensure that you get the maximum benefit out of the investment.

Here, we will discuss ways to redeem a mutual fund investment and other important factors surrounding redemption.

Ways to redeem a mutual fund

If you have invested in a mutual fund and are looking to exit partially or fully, here is how you can easily redeem the mutual fund units:

  1. Through an Asset Management Company or Transfer Agent: An AMC is a company that pools funds from investors and invests the same into different mutual fund schemes as per their internal research matrix. As an investor, you can directly reach out to the AMC or a transfer agent and request for redemption of your mutual fund. If the AMC/ transfer agent has an online mechanism, you can also do this process through its official website.
  2. Through your personal DEMAT account: If you have a dematerialisation or DEMAT account, you can apply for redemption of funds by logging into your Demat account and choosing the number of units you want to sell.
  3. Through an agent/ fund manager: If a portfolio manager or fund manager is handling your investments, you can also contact these agents. They can complete the entire redemption and exit procedure on your behalf.
  4. On your own: You could also use app-based investment platforms like Fisdom to redeem or withdraw your mutual funds at your convenience with a tap.

Basics of mutual fund withdrawal

Here are some must-know factors surrounding mutual fund withdrawal that every investor should carefully consider before redemption:

In India, the Income Tax Act has special provisions for the treatment of receipts through the withdrawal of investments. 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%. 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.

Hence, it is always wise to consult your tax advisor before applying for any withdrawal of your mutual fund schemes. This is because tax advisors can help in taking the necessary steps to save tax and ensure higher net earnings.

  • Exit load

While purchasing mutual fund schemes, you may have come across the words entry loads and exit loads. This is the cost that the mutual funds charge as transaction fees when you purchase or ‘enter’ a scheme and when you sell or ‘exit’ a scheme. 

Exit loads are usually charged while redeeming mutual funds before their stipulated period. Thus, in case of an early application for a withdrawal, these exit loads (which is usually 1%) should be carefully considered to ensure that the cost charged by the fund managers does not end up reducing your net profits.

  • Lock-in period and processing time taken

As mentioned earlier, mutual fund investments are subject to several conditions that have to be fulfilled in order for a successful withdrawal. Some of these are applicable tax rates, lock-in periods, and transactional costs attached. Usually, closed-ended mutual funds have a lock-in period that can range from a few months to 3-5 years. Open-ended mutual funds except the ELSS instruments are fairly liquid.

You can withdraw from a mutual fund scheme anytime after its lock-in period is over. However, if you intend to make a prior withdrawal, you can do so after paying an applicable penalty.  

Thus, the right time to withdraw mutual funds should be when your funds have reached maturity and have no conditions or qualifications attached to them. This way, you will generally be able to avoid paying any penal charges. However, if you need funds for the fulfilment of your immediate financial goals, you can go ahead with the withdrawal anytime after consulting your financial advisor. 

  • Avoid idling funds

The last and most important thing about mutual funds withdrawal is the use of these funds. If you are redeeming your investments before their maturity, make sure that it is for a specific reason or goal and not to keep the funds idle in your bank account. Idle funds in the bank account will not generate any profits nor will it allow you to fetch fresh income, which would have been the case had your mutual fund schemes been active.

Further, in all the withdrawal cases mentioned above (except offline), the money receivable on redemption will be directly credited to your registered bank account through the NEFT facility within 2-4 days. In the case of the offline mode of redemption, it may take slightly longer to get the funds in hand.

Conclusion

Mutual fund withdrawal should be carefully considered before making a decision. If you do not have a definite reason to redeem your funds, it is wise to stay invested. Market fluctuations can, at times, be intimidating. However, an investor should always practice patience in such situations and consider staying invested to reap benefits in the long run.


Frequently Asked Questions

Can I redeem a mutual fund anytime?
Mutual Funds which have a Lock-in Period, generally in the case of open-ended schemes, can be redeemed at any point of time. Some mutual fund schemes like ELSS (Equity Linked Savings Scheme) cannot be redeemed up to three years from the investment start date.

How do I withdraw money from mutual funds?
An investor can withdraw money from mutual funds in one of the following ways:

  1. Through AMC
  2. Through trading / Demat account
  3. Through agent/distributor
  4. Through registrar or transfer agency
  5. Through an investment based platform like Fisdom

Can I withdraw from a mutual fund anytime?
You can withdraw from your mutual fund holdings at any time as long as it is an open-ended fund. Mutual fund investments can be withdrawn as soon as the fund is available for daily sale and repurchase.

What is the right time to redeem mutual funds?
Redeeming mutual fund units can be done as per individual financial goals and investment discretion. Investors must carefully consider withdrawal before deciding, as it can directly impact the potential to generate higher profits.

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Akshatha Sajumon