When Should You Redeem Your Mutual Fund Investments

4 mins read
It is easy to know when to invest in a mutual fund - when you can afford to keep a significant portion of your income illiquid. But it gets tricky when it comes to choosing when to get out of one.

What is mutual fund redemption?

Mutual fund redemption is the act of withdrawing your funds from a mutual fund that you had earlier invested in. The process is usually quite fast.

When is the right time to redeem your mutual fund?

It is hard to decide your mutual fund redemption time, especially if you have hopes of your portfolio increasing in value in the near future or you are unsure of what are the financial implications of such a mutual fund redemption.

The following are the usual circumstances when an investor should redeem mutual funds that they had invested in:

1. When the investor is quite close to or has reached his/her goals to meet which he/she had started investing in the first place.

For example, if you had planned to invest in a mutual fund until your corpus of funds reach ₹ 1 cr so that you could start your own business with that amount, then you should follow through with your plan. It is important to not get too used to passive income if you already have plans to actively use funds for higher returns.

2. If the mutual fund has failed to perform consistently, including in comparison to other funds and avenues for passive income.

For example, if mutual fund A has given only 5% returns over the last 3 years while mutual funds B, C and D have been giving returns of 7%, 12% and 15% over the same time period then it does not make sense to keep faith in mutual fund A. This is especially true if the fund is underperforming within its own class of funds e.g. being the worst performer among debt funds or small cap funds. On the flip side, if the fund is not performing that well, but is performing better than the economy or the sector or some other benchmark, then perhaps you should stick by that fund.

3. When the investor feels the need to simply rebalance the portfolio due to changes in market trends

Sometimes you need to adjust your portfolio by changing the number of units invested for each security – in such cases you may want to rebalance the existing portfolio under the same agency. If that is not possible, then you can redeem your portfolio and shift it to a different fund partly or completely.

What all to consider while deciding the mutual fund redemption time

  1. Net Asset Value (NAV) –

    The value of the redeemed mutual fund is based on its NAV on the date of redemption. It is defined as the difference between the total asset value and the total liabilities of the fund. The NAV for each day of trading is declared at the close of the trading day. Therefore, choose the date of redemption to be on a day when the Net Asset Value (NAV) is rather high as it will give you a higher value.

  2. Lock-in Period and Exit load –

    Mutual funds may place a ‘lock-in period’ when the money invested is supposed to stay in the fund and not be withdrawn. If, however, a need does arise and the investor is forced to withdraw money from the fund, then an exit penalty also known as an ‘exit load’ must be paid by the investor. Therefore, before redeeming, every investor should check if their lock-in period is still not over and there are any exit loads to be paid for the redemption – if yes, what are its financial implications on the overall investment and financial position?

  3. Tax implications –

    At the time of redemption, there are various types of taxes imposed on long term and short term capital gains, equity and debt funds (as well as hybrid funds). Therefore, it is important to know what will be the tax requirements for redeeming funds at that point in time.

How to redeem mutual fund online

Mutual fund redemption online is an easy process if you follow the following steps:

  1. Visit the portal of the mutual fund online and log in using your Permanent Account Number or folio number
  2. Choose your scheme, then select the number of units you would like to redeem and confirm the redemption.

You may also redeem your mutual fund through a central services provider such as Karvy and CAMS (Computer Age Management Services Pvt. Ltd.)

Final words

If you are interested in mutual funds investment or equity investments, try learning more about how the stock market works. If you do not have a Demat account, open one today in a matter of minutes.