# Redemption: Definition in Finance and Business

> **Definition**
>
> Redemption refers to repaying mutual fund shares or a fixed-income security when it matures or before.

## What Is Redemption?

In finance, redemption is repaying a [fixed-income security](https://www.investopedia.com/terms/f/fixed-incomesecurity.asp) when or before it matures. It usually involves redeeming [bonds](https://www.investopedia.com/terms/b/bond.asp) or [mutual fund](https://www.investopedia.com/terms/m/mutualfund.asp) shares.

Redemption may trigger capital gains or losses for an investor. The investor’s taxation of capital gains will be reduced by any capital losses recognized in the same year.

Most redemptions are made for cash, but others are in-kind redemptions (nonmonetary payments made for securities or other instruments).

Redemption also applies to [coupons](https://www.investopedia.com/articles/personal-finance/051815/pros-cons-using-coupons-your-business.asp) and [gift cards](https://www.investopedia.com/terms/g/gift-card.asp), as consumers use them to get products and services.

### Key Takeaways

*   Redemptions in finance often involve reclaiming bonds or mutual fund shares at maturity or an earlier specified date, impacting an investor's gains or losses.
*   Callable bonds, which issuers can redeem before maturity, demonstrate a strategic financial maneuver, especially when interest rates are favorable.
*   Redemption of mutual fund shares requires a formal request to the fund manager, and the payout is typically the market value minus applicable fees.
*   In-kind redemptions, used mainly with ETFs, allow investors to swap shares for equivalent securities, offering a tax-efficient strategy to avoid capital gains.
*   Mutual fund redemptions can incur costs like back-end loads, emphasizing the importance of long-term investment strategies for minimizing expenses.

![Redemption: The return of mutual fund shares or of money invested in a fixed-income security on or before its maturity date.](https://www.investopedia.com/thmb/IBLYwic7FV8PuNqc9g_ReaaGpo0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/redemption.asp-final-914afab5f58948eaa63f92167e67d53e.png)

*Redemption may generate a capital gain or loss, each recognized on fixed-income investments and mutual fund shares. — Jessica Olah / Investopedia*

## How Redemption Works in Finance and Business

Investors in fixed-income securities, like bonds, get regular fixed interest payments. Bonds can be redeemed either before or on their [maturity date](https://www.investopedia.com/terms/m/maturitydate.asp). If redeemed at the time of maturity, an investor receives the [par value](https://www.investopedia.com/terms/p/parvalue.asp) (also called the face value) of the bond. This refers to the original value of the bond when it was first issued and is the amount of money the issuer of the bond agrees to repay the bondholder.

A [callable bond](https://www.investopedia.com/terms/c/callablebond.asp), or redeemable bond, can be redeemed by the issuer before it matures. Redemption value is the price at which a company buys back the bond before it matures. A callable bond allows the issuer of the bond to pay off its debt early. Issuers might call their bonds if market interest rates drop.

Investors can also redeem their mutual fund investments. Investors must tell their fund manager to redeem a mutual fund. The manager must process the request promptly and pay the funds to the investor. The investor usually gets the current market value of their shares minus any fees.

We regularly redeem items like coupons and gift cards in daily life. A coupon or gift card is redemption since you exchange it for goods or services.

### Did You Know?

Bonds are the most common fixed-income security, but others are also available like:

*   [Certificates of deposit (CDs)](https://www.investopedia.com/terms/c/certificateofdeposit.asp)
*   [Treasury notes (T-notes)](https://www.investopedia.com/terms/t/treasurynote.asp)
*   [Preferred shares](https://www.investopedia.com/terms/p/preferredstock.asp)

## Navigating Capital Gains and Losses During Redemptions

The [redemption of an investment](https://www.investopedia.com/ask/answers/13/difference-between-redemption-and-repurchase-of-shares.asp) may generate a [capital gain](https://www.investopedia.com/terms/c/capitalgain.asp) or [loss](https://www.investopedia.com/terms/c/capitalloss.asp), both of which are recognized on fixed-income investments and mutual fund shares. Taxation of capital gains is reduced by capital losses recognized in the same year. Mutual fund gains and losses are included in the same capital gain calculation.

To compute the [capital gain or loss on redemption](https://www.investopedia.com/news/etf-open-secret-theyre-tax-loophole/), the investor must know the cost basis, which is the original value or purchase price of the asset. Bonds can be purchased at a price other than the par or face amount of the bond.

Assume, for example, that an investor buys a $1,000 par value [corporate bond](https://www.investopedia.com/terms/c/corporatebond.asp) at a discounted price of $900 and receives a $1,000 par value when the bond is redeemed at maturity. The investor has a $100 capital gain for the year, and the tax liability for the gain is offset by any capital losses the investor might have. If the same investor purchases a second $1,000 par value corporate bond for $1,050 and the bond is redeemed for $1,000 at maturity, the $50 capital loss reduces the $100 capital gain for tax purposes.

## Exploring Different Types of Redemptions

Most redemptions are made for cash. So when a mutual fund investor requests a redemption, the fund management company will issue the investor a check for the shares at market value. But there are cases where redemptions may be made in-kind.

### Understanding In-Kind Redemptions and Their Benefits

In-kind redemptions are nonmonetary payments made for securities or other instruments. In-kind redemptions are rarely used in the mutual fund industry, but are common with [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp). Fund managers may feel redemptions hurt long-term investors. Therefore, instead of paying out cash to those who wish to exit a fund, they offer positions in other securities on a [pro-rata basis](https://www.investopedia.com/terms/p/pro-rata.asp).

ETFs are generally considered more tax friendly than mutual funds. By issuing shares in-kind, the ETF does not have to sell securities to raise cash for redemption payouts. This, in turn, eliminates the need for capital gains distributions, cutting down the investor’s tax liability.

### Key Aspects of Mutual Fund Redemptions

The redemption of fund shares from a mutual [fund company](https://www.investopedia.com/terms/f/fund_company.asp) must occur within seven days of receiving a request for redemption from the investor. Because mutual funds are priced only once per day, investors who wish to redeem their money must place the order before the market’s close or the time set by the mutual fund.

Money is redeemed at the fund’s [net asset value (NAV)](https://www.investopedia.com/terms/n/nav.asp) for the day, which is calculated as the sum of the value of the assets of a fund less than its liabilities. Once the sale is completed, clients typically receive their funds, including any gains via check or direct deposit to their bank account.

Some mutual funds may have redemption fees attached in the form of a [back-end load](https://www.investopedia.com/terms/b/back-end-load.asp). A back-end load is a sales charge—a percentage of the fund’s value that declines over time. If the investor holds the fund shares for a longer amount of time, the back-end load charged when the shares are redeemed is smaller.

Investments in mutual funds are designed for individuals who buy and hold fund shares for the long term, and selling fund shares after a short period of time results in higher costs to the investor. The investor pays sales charges and annual fees for professional [portfolio](https://www.investopedia.com/terms/p/portfolio.asp) management and the fund’s accounting and legal costs.

## The Bottom Line

Redemption means getting back your mutual fund shares or money from a fixed-income investment when or before it matures. Bonds and mutual fund shares are the fixed-income securities that are usually redeemed.

Redemptions can trigger capital gains or losses for investors. Capital gains taxes will be reduced by any capital losses recognized in the same year.

Investors redeem mutual fund shares by submitting a formal request to the fund manager. Money is redeemed at the fund’s net asset value (NAV) for the day, less applicable fees.

The alternative to cash redemptions is in-kind redemptions, particularly within the ETF sector. By letting investors swap shares for equivalent securities, they offer tax benefits by avoiding capital gains distributions.

Understanding the redemption process is crucial for making informed investment decisions and managing your financial portfolio effectively.  

> **Article Sources**
>
> 1.  Financial Dictionary. “[Redemption](https://financial-dictionary.thefreedictionary.com/Redemption).”
>     
> 2.  Investor.gov, U.S. Securities and Exchange Commission. “[Callable or Redeemable Bonds](https://www.investor.gov/introduction-investing/investing-basics/glossary/callable-or-redeemable-bonds).”
>     
> 3.  Investor.gov, U.S. Securities and Exchange Commission. “[Mutual Funds](https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-funds-etfs/mutual-funds).”
>     
> 4.  Internal Revenue Service. “[Topic No. 409, Capital Gains and Losses](https://www.irs.gov/taxtopics/tc409).”