redemption
Redemption is when you hand back an investment such as a bond or a fund unit and collect the money owed to you, usually at a set date or price.
In plain English
Think of a thrift contribution where everyone agrees that on a certain date, whoever is owed money simply collects it and closes their part of the arrangement. Redemption in investing works the same way. It is the moment your bond, treasury bill or fund unit reaches the end of its agreed life, or you choose to cash it out early, and the issuer or fund manager pays you what is due.
In Nigeria, a common example is treasury bills. Say you bought a 91 day treasury bill for ₦480,000 with a face value of ₦500,000. On maturity day, the government redeems it, meaning they pay you the full ₦500,000. That gap of ₦20,000 was your return for lending them money for those three months.
Mutual funds work similarly. If you hold units in a money market fund and decide you need your money back, you place a redemption request. The fund manager sells enough assets to pay you, and within a few working days, the money lands in your account. This is different from selling shares on the stock exchange to another investor, because with redemption, you are dealing directly with the fund or the issuer, not a stranger on the other side of a trade.
A diaspora example makes this clearer. Someone in Manchester investing in a Nigerian dollar bond through their bank might wait years for the bond's redemption date, when the Nigerian government or company that issued it pays back the principal in full, on top of the interest already received along the way.
Redemption can also carry a penalty if you cash out too early. Many funds and some bonds charge an exit fee if you redeem before an agreed minimum holding period, so it pays to read the fine print before you commit your money.
You invest ₦1,000,000 in a fixed income fund with a 90 day minimum holding period. You redeem after 120 days, no penalty applies, and the fund manager pays your ₦1,000,000 plus accrued returns into your bank account within three working days.
Questions people ask
Is redemption the same as selling my shares?
Not quite. Selling shares on the stock exchange means another investor buys them from you at the market price. Redemption means the issuer or fund manager pays you directly, often at a fixed or calculated value, not a price set by buyers and sellers haggling on an exchange.
How long does redemption take in Nigeria?
For most money market and fixed income funds, it takes between one and five working days after you submit your request, though some funds process it faster. Treasury bills and bonds pay out automatically on their maturity date without you needing to ask.
Can I lose money on redemption?
Yes, if you redeem before the agreed minimum period, some funds charge an exit fee that reduces what you receive. There can also be market related losses if you are redeeming units in a fund whose value has dropped since you invested.
Last reviewed