Redeeming Your Mutual Fund Investment - Key Things To Know

We choose to invest in a mutual fund scheme after careful selection, perhaps with the assistance of a financial advisor. Hopefully the investments would be linked to specific goals and not be random. Because this would help one to stay calm during market swings and not give in to pressures to sell off in panic.

While much is usually said about how to invest and things to bear in mind while investing very little is said about what to take care of while redeeming your investments. Here are some basics on this –

Certain schemes have a lock-in period. Investments cannot be redeemed during this period. Typically tax saving ELSS and RGESS products have lock-in periods. Check if your investment has a lock-in period.

On redeeming your mutual fund scheme units the return you earn is linked to the day’s NAV (Net Asset Value). Only for redemption application received at the concerned service center by the stipulated cut-off time would qualify for NAV of the same day (subject to realization of funds as per the provisions of SID). For applications received post that time the next business day’s NAV would apply.

Apart from these there are two other aspects to consider while planning redemption:

1. Taxes applicable on mutual fund investments
The returns you earn from mutual fund investments attract capital gains tax. This taxation actually depends on how long the investment was held. Long term investments attract lower capital gains tax than short term ones.

Equity mutual fund schemes are exempt from long term capital gains tax if the investments are held for more than 12 months. If they are held for 12 months or less, then your capital gains would be taxable at 15% (plus applicable surcharge & education cess). Non-equity funds attract long term capital gains tax of 20% with indexation (plus applicable surcharge and education cess) if held for more than 36 months. If held for 36 months or less the tax rate is linked to your individual tax slab. The highest tax rate would be 30% of the capital gains (plus applicable surcharge and education cess) of the capital gains.

Please note that Capital Gains tax is not deducted at source by the Fund House when the units are redeemed, the individual must pay it by himself. Also, these tax rates are as applicable for resident investors. They are slightly different for NRI investors.

When you invest in the Dividend option of a mutual fund scheme, the dividend distributed by the Fund House, in these options are Tax Free. However the fund house will deduct Dividend Distribution Tax (DDT) in debt schemes at 25% plus applicable surcharge and education cess. DDT is not applicable on dividend declared in equity mutual fund schemes.

2. Exit load
Mutual funds charge exit load, which is a type of fee, when an investor redeems units from the fund. Exit loads usually apply only until a certain holding period has been achieved in a particular mutual fund scheme. Generally equity schemes have exit load for longer durations – for the obvious reason that equities are meant for long term investments – compared to debt schemes and liquid schemes. In a way this serves the purpose of discouraging quick withdrawal from investment and thus mutual fund exit loads actually work for you!

Exit load may be charged as a percentage of NAV either flatly or calibrated over various holding periods. Thus a scheme may charge 2% exit load for withdrawal anytime within 2 years and nothing after that, or charge 3% up to year 1, 2% up to 1.5 years, 1% up to year 2 and nothing after that. Plan your redemption in such a way that you do not have to part with some of your returns as exit load.

Finally, before you redeem investments don’t forget to evaluate whether this is solely a sentiment driven urge based on market conditions, or the execution of a goal-based investment strategy. If it is the former, you may be leaving open a door for regret in the future, whereas if it is part of a strategy you wouldn’t be too bothered about market conditions. Do consult with a financial advisor to arrive at what is best for you.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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