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    Factors to Consider Before Redeeming Your Mutual Fund

    Published on March 16, 2020

    The internet is flooded with information about mutual funds. There are websites catering to selling mutual funds, and if you want, you can gather as much knowledge as you can about mutual funds. Just as one takes their own sweet time while picking up a mutual fund and goes through its various attributes like the fund size, the number of years it has been in the market, its historical performance, etc. there are certain factors that one needs to consider while withdrawing or redeeming their mutual fund units.

    Here are a few things every investor should take into consideration while redeeming their mutual fund units:

    The reason behind your redemption
    Currently, the market is in turmoil and dropping points almost every single day. Are you freaking out because of this market upheaval and redeeming your mutual fund investments? If so, then you might want to reconsider because a lot of investors take advantage of market vagaries and invest more rather than redeeming. Also, there is a possibility that your fund is underperforming too during such volatile situations, and if you are redeeming your mutual fund units at this hour, it might not be a great choice.

    The exit load of the fund
    Exit load is nothing but cost mutual fund unitholders need to pay while redeeming their units. Different types of mutual funds have different exit loads, and the withdrawal policies differ as well. For example, one fund may levy .50 percent exit load if units are redeemed within a year, whereas other funds may levy a 1 percent exit load. Hence, it is necessary to check your fund’s exit load and redeem it accordingly.

    Which mutual fund units are you redeeming?
    If you have investments in an equity scheme like ELSS, remember that ELSS has a three year lock-in period. In such situations, redeeming your units before the lock-in period will result in the fund house levying premature withdrawal fees on the redeemer. Hence, it is better that you add other funds to your mutual fund folio, which you can quickly liquidate.

    Understand taxes levied on capital gains
    If you redeem your units within a year, your equity fund investments are eligible for short term capital gains (STCG). In contrast, if you redeem your units after a year, your returns are eligible for long term capital gains (LTCG). But LTGC is only applicable if your annual returns are above Rs. 1 lakh, whereas STCG is currently somewhere around 15 percent. Capital gain tax for equity, debt, and hybrid funds differs, and hence, make sure that you know how much tax your gains are eligible for before withdrawing.

    Redeem only if necessary
    Having a diversified mutual fund is essential if you want to master the art of withdrawing strategically. If there’s an emergency and you need immediate cash, it is advisable that you first withdraw your debt funds, and if you still need more capital, redeem your equity mutual funds. That’s because equity mutual funds tend to provide better returns only when held for the long term and are usually considered for meeting long term goals. Hence, withdraw your mutual fund units smartly without rushing to any conclusions.

    Remember that investment is a long journey, and the key to successful investing is inculcating the habit of saving regularly. You can invest in mutual funds via SIP and give your investments a systematic approach. With SIP, all you need to do is instruct your bank, and every month on a fixed date, a predetermined amount is debited from your bank account and transferred to your mutual fund electronically. So you can continue investing for as long as you wish and redeem your mutual fund units keeping the above pointers in mind.