In the context of mutual funds, what does 'redemption' refer to?

In the context of mutual funds, 'redemption' specifically refers to the process of an investor selling shares back to the fund. When an investor redeems shares, they are essentially requesting to convert their investment in the fund back into cash. This transaction allows investors to access their funds, realizing any gains or losses that have occurred since their initial investment.

Redemption is a fundamental mechanism within mutual funds, providing liquidity to investors. When shares are redeemed, the mutual fund uses the investor’s request to sell the appropriate number of shares and, in return, pays out the current value of those shares to the investor based on the net asset value (NAV) at the time of redemption. This process is a key aspect of how mutual funds operate, ensuring investors can enter and exit their investments with relative ease.

In contrast, buying shares from the fund is known as 'subscription,' while liquidating fund assets for cash refers more to broader asset management activities, and ending a mutual fund’s operational period relates to the closure of the fund itself, neither of which align with the redemption process.