10.7 Financial Transactions with Mutual Funds

The Four Financial Transactions

A transaction is financial when it changes the value of the holding. Changes of address, bank mandate or nomination are non-financial and are covered in section 10.11.

Purchase and Additional Purchase

Minimum amounts are stated in the scheme documents and vary by scheme, typically with a lower minimum for additional purchases than for the first investment, and a lower one still for systematic instalments.

Processing requires:

• Application received at an Official Point of Acceptance within the cut-off time
• Funds realised and available for utilisation
• KYC complete and PAN valid

Units are then allotted at the applicable NAV, net of stamp duty.

Redemption

A redemption request may be made in either of two ways:

Requesting by amount carries a subtlety worth knowing: because the applicable NAV is not known when the request is submitted, the exact number of units redeemed is determined afterwards. An investor who needs a precise sum should redeem by amount; one who wants to retain a precise unit holding should redeem by units.

First-in, first-out

Units are redeemed on a FIFO basis, oldest first. This determines:

• Whether exit load applies, since load depends on each parcel's holding period
• Whether gains are short-term or long-term, since holding period is measured per parcel
• The cost of acquisition used in computing the gain

For a long-running SIP this works in the investor's favour, because the oldest instalments — most likely to qualify as long-term and to be free of exit load — are redeemed first.

Units that cannot be redeemed

• Units under statutory lock-in, such as ELSS within three years of each instalment
• Units under lien or pledge, until the lender releases them
• Units in a folio frozen for documentation, such as a minor attaining majority
• Units in a segregated portfolio, which are not redeemable from the fund at all
• Units where KYC is on hold

Switch

A switch is a single instruction executing two transactions:

Switch out of Scheme A  =  Redemption from Scheme A
Switch into Scheme B    =  Purchase into Scheme B

The consequences follow from that, and every one of them surprises investors:

Switching is available between schemes of the same fund house. Moving between fund houses requires a redemption and a separate fresh purchase, during which the money is out of the market.

Common switch scenarios:

• Regular plan to direct plan — a taxable redemption, which must be stated before executing
• Growth to IDCW or the reverse — also a taxable redemption
• Equity to debt as a goal approaches — the correct use of a switch, and the tax cost is simply part of the decision
• Between schemes for performance reasons — legitimate occasionally, and the pattern AMC due diligence examines when it becomes habitual

Suspension of Transactions

A scheme may restrict or suspend redemption only in exceptional circumstances and subject to strict conditions — market-wide closure, a systemic crisis or operational events beyond control. Restrictions may be imposed only for a limited period with trustee approval and disclosure to SEBI, and small redemption requests up to a prescribed threshold must continue to be honoured. Suspension is not available to manage ordinary redemption pressure.

What a Distributor Should Confirm Before Any Redemption or Switch

1. Is any part of the holding under lock-in, lien or pledge?
2. Will exit load apply, and on how much of the holding?
3. What are the capital gains consequences, and would waiting change the treatment?
4. Are the bank details in the folio current?
5. For a switch, has the investor understood it is a taxable redemption?

Asking these five questions takes two minutes and prevents most post-transaction complaints.