Factors to Consider Before Redeeming Your Mutual Fund Investment

If several factors come into play while deciding the best mutual fund to invest in, there are multiple considerations you need to keep in mind for mutual fund redemption. Fund redemption shouldn’t be a rushed exercise but a calculated move. There are numerous factors you need to consider before this all-important exercise.

Mutual Fund Redemption - Important Considerations

Before undertaking the redemption exercise, consider the following things and ask yourself these questions:

• Have You Reached Your Goal?

When you choose the best mutual fund to invest in, it’s to accomplish a particular goal. Be it building an emergency corpus, accumulating funds for buying a house or saving for your child’s higher education or retirement, find out if you’ve reached your goal or not.

You can consider redemption if you have accomplished your goal from the fund. On the other hand, if not, you should stay invested until achieved.

• Has the Fund Underperformed Considerably for a Long Period? Underperformance or poor performance compared to the fund’s benchmark index or peers is a strong reason for redemption. However, you need to carefully understand the true reason behind a fund’s underperformance for a long time.

If it’s due to the strategies adopted by the fund manager, you can go ahead and place a redemption request. On the other hand, if market turmoil due to economic and political upheaval has contributed to a fund’s underperformance, you can see some more time before redemption.

• Is There a Change in the Fund’s Objectives?

You have opted for the best mutual fund to invest believing its objective matches yours. However, if there’s a change in its objective due to regulatory diktat or decisions taken by the asset management company (AMC) and it no longer matches yours, you can look to redeem.

For example, after Sebi’s rejig of mutual funds in 2018, several funds had to be merged, and new categories had to be created. This changed the objectives of many funds. You can consider redemption if you find a change in the fund’s objective, which no longer matches yours.

• Have Your Goals Changed?

Mutual fund redemption often entails a change in your goals. For example, while you’ve chosen a fund to invest to accomplish a particular goal but you’ve changed your mind, or the goal has taken a backseat, you can consider redemption.

Life evolves, and so do goals. If you anticipate a major shift in goals, you can opt for redemption.

• What Will the Tax Implications and Exit Load Be?

This is another vital thing to consider before mutual fund redemption. Mutual fund redemption tax is the tax you need to pay when redeeming your investment. Mutual funds' taxation is based on their holding period and the fund type (equity or debt).

Long-term capital gains (LTCG) on equity funds are now taxed at 12.5% for gains exceeding ₹1.25 lakhs. On the other hand, short-term capital gains (STCG) are taxed at a flat rate of 20% . Gains from debt funds get added to your income and taxed as per your tax slab. Also, if you exit within a year of investment, you need to pay an exit load.

Wrapping it Up

As evident, mutual fund redemption is a culmination of several factors and not one. Ensure the exercise is well thought-out, and seek professional help if required. Exiting at the right time can help you maximise gains and ensure you’ve the money when needed.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Neo Research Team, nor is it a report published by the Kotak Neo Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.