Last Updated on Sep 1, 2021 by Manonmayi

Majority of mutual funds are liquid investments – meaning, they can be redeemed at your will. However, there are some funds that have a lock-in period. One such scheme is the Equity Linked Savings Scheme (ELSS) that has a 3-year maturity period. But once the lock-in period is completed, an investor is free to redeem the scheme partially, completely or remain invested for longer. Let’s understand how to withdraw money from a mutual fund scheme.

This article covers: 

What does redemption from mutual funds mean?

Withdrawal is the process of liquidating your investments. In mutual funds, this process is called redemption. When you withdraw money from a mutual fund scheme, you are essentially redeeming the units. You sell the units that you own and realise their value at the applicable NAV. For example, say you have purchased 10,000 units of a mutual fund scheme. You may redeem or sell a particular number of units or withdraw a particular amount in currency terms. Assuming each unit is priced at Rs 10, if you want to withdraw Rs 50,000 you would have to redeem 5,000 units from your mutual fund holding. Similarly, you can choose to redeem 100 units or 9,000 units, and withdraw equivalent money from your mutual fund portfolio.

Types of mutual fund redemptions

There are two types of redemptions in mutual funds:

Partial withdrawal

Under this type, you withdraw money from mutual funds partially. This means that you redeem a part of the investment while the remainder remains invested. The above-mentioned illustration was an example of partial withdrawal wherein you withdrew Rs 50,000 or a small number of units out of the total 10,000 units or Rs 1 lakh that was available to you as part of your mutual fund holding.

Full withdrawal

A full withdrawal is when you sell off your mutual fund scheme completely, redeeming all the units that were in your mutual fund folio. In this case, you withdraw all the money – your capital and any price appreciation the fund has experienced – and exit from the scheme. So, in the above example, if you would have withdrawn the whole 10,000 units, it would have full withdrawal from the scheme.

How to withdraw money from a mutual fund?

Withdrawing money from a mutual fund scheme is quite simple. There are various ways to redeem your funds as described below.

Through your broker or distributor

If you have invested in the mutual fund scheme through a broker or a distributor, you can withdraw through them as well. Approach your broker and place a withdrawal request. If you want to do the withdrawal offline, you would have to fill up and submit a withdrawal request form. The broker would submit the form to the Asset Management Company.

On the contrary, if the broker has an online service through a portal or mobile application, you can redeem online too. Log into your mutual fund account, choose the withdrawal option, specify the number of units that you want to withdraw and your withdrawal request would be processed in real-time.

Through the Asset Management Company

You can approach the AMC directly and redeem your mutual fund scheme. You can either visit the branch office of the AMC and submit an offline request for withdrawal or you can do so online. Just visit the official website of the AMC or download its mobile application and request redemption.

Through the R & T Agent

Registrar and Transfer Agents help you invest in mutual fund schemes and also withdraw from them. You can withdraw through R & T Agents like CAMS and Karvy by placing an offline or online request.

Through your Demat and trading account

If you have invested in mutual fund schemes using a Demat and trading account, you can withdraw through these accounts as well. Log into your account to check your mutual fund investment, choose the amount that you want to withdraw and submit your request. Once the request is verified, the redemption would be processed and the money would be credited to your linked bank account.

Things to keep in mind when withdrawing money from mutual funds

When you are withdrawing money from your mutual fund account, two main things should be considered:

  1. The exit load, if applicable
  2. The tax implication

The application of exit load on withdrawals

Some mutual fund schemes levy an exit load if you withdraw from the scheme within a specified time. For example, say a mutual fund scheme levies an exit load of 2% on redemptions within a year. In such cases, if you withdraw money within the first year of investment, you would have to pay the exit load on the withdrawn amount. Suppose the withdrawal amount is Rs 1 lakh, you would get Rs 98,000, subtracting for the exit load, on redeeming the fund. The exit load is applicable regardless of a partial withdrawal or a full withdrawal.

The tax implication of withdrawals

Mutual fund redemptions are subjected to tax if you earn profits from the transaction. Here’s how the tax liability is determined.

In the case of equity funds, returns earned on redeeming mutual fund units within 12 mth qualify as short-term capital gains. Such gains are taxed at 15%. On the other hand, withdrawals after 12 mth attract long-term capital gains tax. Returns up to Rs 1 lakh are exempted from tax. Returns exceeding Rs 1 lakh are taxed at 10%.

In the case of debt funds, withdrawals within 36 mth attract short-term capital gains tax. Returns earned in such cases are taxed at your slab rates. Withdrawals after 36 mth are subjected to long-term capital gains tax. Returns thus earned are taxed at 20% with the benefit of indexation.

The bottom line

If you are in need of money for immediate use, your mutual fund investments can be a quick source of funds. The advantage with mutual fund investments is that you may redeem them partially or fully, in unit-terms or money-terms. In that sense, mutual fund investments offer flexibility in terms of redemptions. Understand how to withdraw money from a mutual fund and then withdraw online or offline. However, do keep the exit load and tax implication in mind when redeeming your mutual fund units.