When Is the Right Time to Redeem Mutual fund?
Most investors tend to treat mutual funds as shares in stock market, but both are not same. Whereas a share is a single script, an equity mutual fund is a portfolio of many such shares of different companies. With thousands of plans from 40+ mutual fund houses in India it’s difficult to decide which fund to invest in. As an investor, most difficult activity is not just buying the right fund but also selling the right funds at the right time.
Factors to consider before redeeming units from a mutual fund scheme; A) Exit Load: Most funds come with an exit load of 1%, if the funds are redeemed within 365 days from the date of investment. In some cases, the load may be higher and may be for a longer duration. Example Accrual Debt funds. B) TAX: Tax on mutual funds are basically classified in 2 categories STCG (Short term Capital Gain) & LTCG (Long Term Capital gain)
| Fund Type | Less than 1 Year Holding | More Than 1 Year Holding | More Than 3 Year Holding |
|---|---|---|---|
| Equity/ Equity Oriented Hybrid fund * | 15% On return | 10% Tax applicable if return is more than ₹,1 Lakhs | 10% Tax applicable if return is more than ₹,1 Lakhs |
| Debt/ Debt Oriented Hybrid fund* | Return is Taxed as per income slab | Return is Taxed as per income slab | 20% after Indexation. # |
#Indexation allows you to inflate the purchase price using Cost Inflation Index
*On SIP each month investment is considered as new investment and tax is calculated from the date of investment as mentioned in the above table.
Most of the investors do redemptions without much thought. They sell when markets fall and buy more when markets are at peak. It's important to give the decision a careful consideration. Remember, that you originally invested in the mutual fund because you have certain goals in mind.
Typically, investors sell mutual funds for these reasons. 1 Made profit 2 Made loss 3 Need Money 4 Found a better opportunity 5 Emergency
1. Made profit:
Booking profit is important and when you have achieved the financial goal it makes sense to redeem. However, you must consider future potential of the scheme. Sometimes investor end up selling a better performing mutual fund even when they don’t need money.
2. Made loss:
Selling funds that are not doing well is always an easy decision for investor. But this is the time when the evaluation should be stronger as you may end up pulling out money from a real winner. One need to evaluate this with the time frame one is investing in and the underlying stocks which have pulled down the performance. If the portfolio is robust and made of quality stock, then one may consider doing a top up on the scheme rather than pulling out. If underperforms persist consistently for 2-3 years, then it may be wise to take corrective action.
3. Need Money
This is the most dangerous excuse that investors make to sell mutual funds. Most of the reasons given for redemption do not make sense. One should ask oneself do you really need this money now. It may take months and years to accumulate this much wealth, so, avoid reckless redemption.
4. Found a better opportunity
Redemption is advised only if you are very sure that you will be losing a golden opportunity and that opportunity is certainly better in terms of risk and return than the current mutual fund. However, its highly recommend taking an expert advice before making any such decisions. Always compare with post tax returns, also compare return per unit of risk taken and please bear in mind that there is hardly any investment which can beat equity returns in long-term.
5. Emergency
Emergency can strike any of us any day, anywhere & anytime. In such cases, you have no choice but to exit the fund. Be truthful to yourself, buying a luxury phone on prelaunch is not an emergency. For such buying, keep funds in liquid funds separately so that your long-term financial goals are not impacted.
So, when should I redeem my funds?
Answer is simple, you should be guided by your financial goals. You should sell a fund and get your money out when you need it, if you achieve your goal early then switch the funds to a safer fund.
SIP is the best way to create wealth in long term, let your sip run for 5 or 10 or 15 or 20 years, and let the fund grow beyond your expectations, such that you need not worry for down payment for a house, or paying for your child’s education, or buying your dream car or whatever else you want. Review your portfolio with your financial advisor once every year. Also, as you grow old the risk profile changes from aggressive to conservative therefore to maintain right asset allocation mix consider rebalancing your portfolio by redeeming or switching. When you’re getting close to the desired value for your goal you should redeem or switch to safer funds.
As per the current tax rules, a pensioner can use an automated SWP (systematic withdrawal plan) for a regular monthly income.
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