Mutual fund redemption: 7 important factors to consider before redeem

Mutual Fund Redemption Time: Mutual funds have gained a lot of traction in the last few years, all thanks to the hefty returns these market-linked schemes provide over other traditional investment tools. Today, investors have the comfort to invest their money and redeem in just a few clicks. But any decision taken in haste could impact the value of the investment. So, it becomes important for you to consider a few factors and also know how returns are taxed. By knowing about rules and understanding how these rules impact your investment, you can maximise the return. Here, we will tell you about the key factors and rules that an investor should know before redeeming a mutual fund.

1. Goal

Mutual funds investments should always be goal-oriented. The decision on how long years you should stay invested in a scheme depends on the objective of the investment. It is advisable to redeem funds only when the goal is achieved or the objective is accomplished. Any untimely or premature redemption can have an adverse impact on the value of the investment. So if you feel that you are nearing the financial goal that you were saving for and you need money, you should consider redeeming your funds.

2. Goal Change

As a rule of thumb, the longer you leave your money in a scheme, the higher return you will generate. In other words, if you wish to maximise the return on investment, then you should stay invested for a longer term. But every goal needs a different duration to stay invested. If your goal is to buy a car, then you need not stay invested for more than roughly 3-4 years. If you change the goal, the duration will also vary. So, it becomes important to have a balance between the goal and the duration of the investment. For long-term goals such as buying a house, the investment tenure will increase.

3. Asset Allocation

Before you start investing in mutual funds, you should assess your risk appetite and select a scheme accordingly. This will help you in achieving your financial goals. Mutual fund schemes have asset classes such as equity funds, debt funds and balanced funds. The allocations vary from scheme to scheme. It is up to you to decide what asset allocation suits your risk appetite. A fund manager can change allocations subject to the limits specified and not beyond them. The investment should depend on your risk appetite. Mutual fund houses have also experts to guide and manage your investment.

5. Poor Performance 

It is always suggested to never time the market. As mutual funds are market-linked instruments, it is quite normal to see falling returns, especially over the short term. However, you should only worry about your fund’s performance, after checking how other funds in the category have performed or are performing. If your fund has been underperforming as compared to the peer group for more than two years or so, it is a signal to exit and move on.

6. Diversify 

Investing your money in an entire fund in one or two schemes could be riskier. Diversify your portfolio by parking your money into different schemes. By doing this, you can reduce the risk. But avoid over-diversification as it can easily erode your returns.

7. Tax On Redemption

Finally, you should check the tax implications before the redemption. Tax is applicable on your mutual fund investment as per the nature of the investment and the holding period or the tenure. It is, therefore, important to know the tax implications for short-term and long-term redemption.

For equity funds, if you redeem your investment after one year, then the investment is defined as long-term. It is called long-term capital gain (LTCG). Similarly, if you redeem before one year, then it is defined as short-term capital gains (STCG). In debt funds and unlisted equity funds, if you redeem before 36 months, then it is considered STCG. Redemption after 36 months is known as LTCG

EQUITY 15%+cess+ surcharge Tax exempted up to Rs 1 lakh in a year. Gains above Rs 1 lakh are taxed at 10% + cess + surcharge
DEBT As per investor’s IT slab rate 20%+cess+ surcharge


Also Read: ITR filing last date: New income tax regime vs old; check calculator and steps to file Income Tax Return online

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