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There are two forms of mutual fund redemption: full and partial.
How mutual fund redemption works in the financial market. (Representative Image)
A popular investment option, individuals with a decent risk appetite seeking high returns usually invest their assets in mutual funds. Mutual fund investments help investors diversify their portfolios and accumulate wealth to meet their needs and financial goals. Redeeming a mutual fund entails the process of selling it back to the house or asset management company from which you purchased it.
One of the key benefits of mutual fund investment is the ease of buying and selling the desired funds in the financial market. Redeeming is to return those funds in exchange for the prevailing market value. This market value depends on the Net Asset Value, or NAV, which is the per unit price of a mutual fund. The higher the number of units sold back to the company that offered the mutual fund to you at the time of purchase, the higher the redemption price of the fund.
In effect, there are two forms of mutual fund redemption: full and partial. While fully redeeming the mutual funds held means selling the entire investment in one go and getting all the money back into your account, partial redemption is in play when an investor sells a portion of their holdings back to the entity. However, before going ahead with your mutual fund redemption, there are a few things you must consider.
Exit Load: Before redeeming your mutual funds fully or partially, assess whether there are exit charges involved. The exit load is the fee imposed by the mutual fund company if the investor redeems their units before a pre-specified period.
Tax Implications: Also, check what the tax implications are of selling your mutual funds back to the seller. Since short-term capital gains are taxed at a higher rate than long-term capital gains in India, staying invested in mutual funds for more than a year before you sell them back could be beneficial.
Market Turns: Avoid redeeming the mutual funds during market downturns, as it severely impacts the redemption price. Any good financial advisor would suggest that you sell your holdings when the market is up to get the correct price for your mutual fund investment.
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