Mutual Fund – Redemption Demystified
An ideal investment is the one that offers you a way out if you are not satisfied with it. A mutual fund is one such instrument that offers a well-defined exit policy, and the decision is left to the investor.
In this blog, we shall cover the redemption of funds, the situation when you can consider redeeming, followed using redemption and checks before redemption.
Redeeming Mutual Funds
With over 4200 funds, it is undoubtedly difficult for an investor to decide on which funds to choose. Once you have zeroed in the fund with the help of investment platforms such as Orowealth, another difficult decision is to track the performance of the fund, decide on when to redeem the funds and how to redeem the funds.
A fund manager invests in multiple asset class such as equities, debt and money market instruments. This variation gives rise to different fund categories, and accordingly, each of the categories has different rules and guidelines for entering a fund and redeeming a fund. An investor should keep in mind both the entry/exit regulations while investing in a fund.
When to exit a fund?
Exit strategy purely depends on the financial goal of an investor. An investor can have a different objective, and thus his investment horizon differs. For example, if you just got married, probably you will start saving for your child’s education from now on given the rising cost of education. In this case, you would ideally remain invested for 15-20 years – assuming you are investing for graduation and post graduation course of your child as these are the courses that cost a fortune.
An objective can be short-term as well. For example, if you are looking to buy a two-wheeler, you would ideally save for one to three years.
So what did you notice from the above two scenarios?
Goals are more important. Thus, if you see that you are getting close to that time, you should sell the fund irrespective of the market condition.
Another reason for redemption
As highlighted previously, there are more than 4200 funds available. Thus, it is a daunting task to refine the fund that suits your profile and objective.
Now assume that you have selected four funds from 4200 that you believe shall help you achieve your goal. But, remember it is not always the case that all four will perform the way you predicted.
Since you are reading this blog on an investment platform, we believe you must have to head the disclaimer that says –
Mutual funds are subject to market risk. Read the offer documents clearly before investing.
If you notice, we have used the term market risk here. Thus, mutual funds are exposed to market risk and can often behave abruptly against our anticipation. We believe if a fund under-performs consistently for two or more years, you should re-visit the drawing board and see if there is any fundamental change. If there is any change in the fund’s investment philosophy, objective or style of investing, you may consider exiting the fund as the fund may not align to your financial objective.
Having said that, remember you should not do panic selling while investing in a fund at the time of market volatility because a short-term correction may not suggest fund’s underperformance. Thus, always have a long-term view instead of a myopic view while assessing the fund from an exit plan.
How to redeem a mutual fund?
Once you are clear about redeeming your fund, there are multiple ways you can do it.
Following are the methods you can employ –
Directly through the asset management company (AMC)
If you have invested in the fund directly through the AMC by visiting their office or through their website, you can sell your fund through the same portal.
All you need to do is to log-in in the fund house’s portal and select the redeem option for the fund you want to sell. Once you choose the redeem option, you will see a total number of units and the number of free units available for redemption. You can sell only the free units. This is because some funds have a lock-in period (for example, Equity Linked Savings Scheme has a lock-in of three years). Thus, you can’t sell the fund if it is still in the lock-in period.
Also, the section will show if there is any exit load applicable. The exit load amount, if applicable, is debited from the final value of the fund. Exit load is typically levied if you are selling your investments before 12 months.
You can also put a redemption request with the AMC office in offline mode. Once the request for redemption is placed with the AMC – either offline or online, you will receive the payment via NEFT or Cheque as per your preferred choice. Ideally, the online mode is faster, and it takes around T+2 days for the amount to get settled.
If you have invested in the funds through a demat/trading account, you can process your redemption through the same. Once you put your redemption request electronically, the AMC processes the payment via NEFT or IMPS in the same bank account that is mentioned in your demat/trading account.
Through third-party platforms (distributors or agents)
If you have invested through any third-party agency such as Orowealth, you can sell off through the same platform. The process is very similar to what we have seen in the previous two options. Once you have filed your request, your request is processed by the AMC via the platform, and you receive the money in your account that is linked in the platform.
Registrar and transfer agency
Central service agencies such as CAMS and Karvy manage the operation behind mutual funds. These agencies provide the option for redemption. All you need to do is download the redemption form, and fill the duly filled and signed form at the nearest CAMS office.
Let us now quickly touch upon, why an investor redeems a fund.
What to look at before redeeming?
As highlighted in the second section, there are several reasons such as fund’s consistent underperformance, nearing the goal, financial crisis, etc.
Before redeeming a fund, an investor should consider his/her decision rationally by taking into account the following aspect –
Underperformance against promise
An investor invests in a fund to meet his financial objective. If you see a fund is underperforming, you should see if there is any change in the fund management style, philosophy, team, etc. If yes, you may exit. If no, you can consider holding the fund for a few quarters and seeing the performance from a longer-horizon instead of short-term underperformance. An active investor may sell units if the long-term prospects seem negative.
Market is high
Don’t sell just because the market is high. In 2008, we felt Sensex at 10000 is very high. In ten years we are talking of 40,000. Thus, the market is likely to climb over time, and an investor should have faith in the professional management of the fund. Remember, timing is not a solution as it ain’t really possible.
Sudden financial crisis
Life is unpredictable so you can’t be prepared for everything. You can always cover the risk and protect yourself. Any emergency may happen, and an investor may need to withdraw funds. The best solution is to have an emergency fund comprising of liquid mutual funds. This helps take care of crisis without compromising on the long-term goal based funds.
If you don’t have any option, you will have to redeem your equity funds that are meant for the different financial objective but keep this redemption for the last priority and try avoiding selling off funds that are built to meet a particular goal.
Also, be mindful of the tax implications and exit load while redeeming an investment.
How to redeem in Orowealth?
Redeeming a fund in Orowealth platform is straightforward. All you need to do is log in to your Orowealth account, go to dashboard and select the fund you want to redeem.
Once you click on redeem, you are done. The amount gets settled in T+2 days depending on the type of fund and timing of redemption.