How does redemption of an equity fund work?

Are you thinking about redeeming a stock fund, but don't know how the process works? Then you're in the right place!

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One point that deserves attention when investing in an equity fund is the redemption period.

It is directly related to liquidity, which is the ease with which a financial asset can be transformed into money.

Furthermore, the redemption period for an equity fund also defines the time in which you will have access to the amount you invested.

To learn more about this topic, continue reading.

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What are equity funds?

Did you know that buying shares is not the only way to access the stock market?

You can also buy equity funds, which are basically investment funds that invest in companies on the Stock Exchange.

This means that they can achieve results through the movement of the traditional stock market.

Their operation is very similar to other funds. The shares are offered to investors by stockbrokers. This means that you can purchase as many shares as you want.

The majority of an investor's assets are made up of shares, stock options, subscription rights, etc.

Regarding decisions about the allocation of financial resources, the main person responsible is the manager, who will create a strategy for this.

Why pay attention to the redemption period of an equity fund?

Despite the importance of timeframe for an investor, it is common to find people who do not consider this factor when deciding to invest.

The problem is that ignoring deadlines can impact your entire portfolio of financial assets.

Obviously, every investor wants to get the maximum return possible.

However, if you consider investment returns as the only criterion when choosing an asset, there is a risk of finding investments that can only be redeemed in the medium and long term.

If you have an emergency and need to access your application immediately, you may even acquire a debt.

Furthermore, ignoring the deadline can increase the chance of financial losses. For example, if you want to buy stocks but your focus is on the short term, you may not achieve your planned goals (those that you set in your financial plan).

Therefore, there is a risk that the investment plan will fail. This is why the redemption period of an equity fund, as well as the profitability of the investments, must be considered.

What are the three deadlines that are part of the money withdrawal process?

To help you better understand how redeeming an equity fund works, we will detail each of the three processes:

1. Quotation deadline

Quotation period is the period that begins to be counted at the moment a financial transaction is carried out, at the same time as the settlement period.

When you invest in a stock fund, your capital is transformed into shares.

However, when you redeem the amount invested in the fund, the opposite happens: the shares are transformed into money.

And it is precisely the time it takes for these two operations to be carried out, which is called the quotation period.

It is important to remember that it takes a few business days for the amount to be redeemed or debited (depending on the chosen investment).

Investors need to be sure that the term of the investment is aligned with their financial goals.

There are two types of quotation period:

• Fast quotation period: the duration is up to five working days.

• Slow quotation period: It can be 15 working days, one month or, depending on the case, one year.

This is why the manager responsible for the fund must frequently analyze the asset portfolio, so that it is possible to move them without harming investors.

2. Settlement period

Anyone who wants to start investing needs to know very well what the settlement period is.

The settlement period is the period within which a trade in the market must be completed or finalized.

In other words, it is the moment when the buyer must make payment to the seller who, in turn, will deliver the assets to the buyer.

When you make the withdrawal request and your money goes through the quotation, you will need to wait for the money to leave the investment fund and enter your bank account.

3. Redemption period

The redemption period is the sum of the quotation period and the settlement period.

This means that it refers to the time it takes for you to request the withdrawal and for the money to reach your account.

In the financial market, the acronym “D+” is what defines the redemption period.

To find out what “D+2” is, for example, remember that it will only be possible to make the withdrawal two business days after the application.

Only business days are counted in this process.

This is why you should pay attention to the redemption period for an equity fund.

If you notice that a particular investment has a very long D+, your finances could be harmed.

How is an equity fund taxed?

Anyone who wants to invest in equity funds also needs to know what taxes are involved: IR and IOF.

Income Tax is levied on the fund's profitability. For example, if the fund yielded 12% in one year, the IR will be applied to this amount. The rate of 15% is charged at source.

Regarding IOF, it only applies to income where the redemption was made in a period of less than 30 days from the application. The rate varies from 96% to 0% depending on the term.

This means that if you request redemption after this period, the IOF will not be charged.

Conclusion

It is a big mistake to start investing in a financial product without knowing what the redemption period is, because if you need to use the money before then, you will incur losses.

Therefore, do not just take into account the profitability of the investment, but also the liquidity, the redemption period and, of course, your investor profile.