Redemption (Mutual Fund)
Redemption is the process of selling mutual fund units back to the scheme at NAV. Under SEBI MF Regulation 49, proceeds must be dispatched within T+1 business days for equity funds and T+2 for debt funds.
Definition
Redemption in mutual funds refers to the transaction by which a unitholder sells their units back to the scheme (or to the AMC on behalf of the scheme) at the applicable Net Asset Value (NAV). This is the primary exit mechanism for open-ended mutual fund investors. SEBI (Mutual Funds) Regulations, 1996 — Regulation 49 mandates the timelines: the redemption amount must be dispatched to the investor's registered bank account within T+1 business days for equity and hybrid equity-oriented schemes, and T+2 business days for debt and other schemes, where T is the business day on which the cut-off NAV is applicable. Schemes cannot withhold redemptions except in extreme circumstances (e.g., market closure, scheme wind-up under Regulation 45).
How Redemption Works Day-to-Day
- Cut-off time: For equity and hybrid funds, the cut-off time is 3:00 PM on a business day. Redemption requests received before 3 PM get the same-day closing NAV; requests received after 3 PM get the next business day's NAV.
- For debt funds: The cut-off time is also 3 PM, but the NAV applied depends on whether the redemption amount triggers the larger-transaction threshold (₹2 lakh for liquid, overnight funds: 1:30 PM cut-off for same-day NAV).
- Unit debit: The RTA (CAMS/KFin) debits the investor's folio on the same business day the redemption is processed.
- Payment dispatch: The AMC initiates an NEFT/RTGS/IMPS payment to the investor's registered bank account within the prescribed T+1/T+2 window.
- Partial vs. full redemption: Investors can redeem a specific number of units, a specific rupee amount, or all units (full redemption, which closes the folio if no other schemes exist in it).
Why It Matters for Investors
- Liquidity certainty: The statutory T+1/T+2 dispatch timeline gives investors a contractual liquidity guarantee. This distinguishes open-ended mutual funds from close-ended funds and real estate/unlisted assets.
- Exit load impact: Redemptions within the exit-load period (see Exit Load Period) attract a percentage deduction from the redemption proceeds. The exit load is credited back to the scheme's assets (not the AMC).
- Tax event: Every redemption is a taxable event. For equity funds held >1 year, Long-Term Capital Gains (LTCG) above ₹1.25 lakh (FY2024–25) are taxed at 12.5%. For <1 year, Short-Term Capital Gains (STCG) at 20%. NRI investors face TDS at source at applicable rates.
- FIFO default: Unless the investor specifies a particular lot, SEBI's guidance and RTA practice defaults to First-In First-Out (FIFO) for tax purposes.
Worked Example
An NRI investor holds 500 units of Axis Bluechip Fund. On Monday at 2:45 PM, they place a redemption request for 200 units through the AMC's online portal. The applicable NAV is Monday's closing NAV (₹55.40 per unit). Redemption proceeds = 200 × ₹55.40 = ₹11,080 minus exit load (nil, units held >12 months) = ₹11,080. Under Regulation 49, proceeds must be dispatched by Tuesday (T+1 for equity). The NEFT credit appears in the investor's NRE/NRO account by Tuesday evening. TDS of 10% was deducted at source (for NRI) on the LTCG component, with a TDS certificate issued by the AMC.
See Also
Primary Source
SEBI (Mutual Funds) Regulations, 1996 — Regulation 49 (redemption timelines): sebi.gov.in — MF Regulations 1996. SEBI Circular SEBI/HO/IMD/DOF5/P/CIR/2021/630 (cut-off time clarifications). AMFI investor awareness: amfiindia.com — MF Transactions.
Past performance is not indicative of future returns. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. ARN-314872. APMI APRN-01658. Content is informational and not investment advice.