KNOWLEDGE CENTRE Mutual Funds Investment Guide / When Should You Redeem Your Investments And When Should You Hold?
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When Should You Redeem Your Investments And When Should You Hold?


Should you redeem you mutual fund?

When considering several investment options, investors tend to look at liquidity in addition to risk and return. Market volatility affects the return on investment (ROI) to a substantial extent. Therefore, investors should keep a track of their investment and constantly stay up to date with the return on the same.

Although redeeming your investments will mean you will have liquid funds in hand, you must decide to redeem a fund only after doing a thorough research about the fund and getting clarity on the reason behind redemption. Majority investors choose to invest in mutual funds for long-term returns and diversification of their portfolio. While most of them are aware of when to enter the market, not many know when to leave. Few schemes come with a lock-in period during which the investors are not allowed to redeem their investment.

What are the Factors to consider when redeeming or holding your investments?

Often investors tend to redeem their investments when one of their funds is under-performing or when the market is bearish. However, this is not the right approach as there are many other factors that need to be considered before opting for redemption.

Following factors need to be considered before you decide to redeem or hold your investment:

  1. Performance
  2. Tax implication of mutual fund
  3. Exit load of mutual fund
  4. Applicable NAV of mutual funds

Let’s understand each of these in detail:

Performance

The first and foremost factor is the mutual fund performance. Interpret the performance of the funds in the long run; do not consider the absolute return. Compare the return of the fund with the benchmark return. Not every scheme will be able to beat the benchmark return; but in case you notice a steady fall in the value of the fund, it is advisable to redeem the investment and replace it with another scheme. If your mutual fund performance is consistent or is offering you higher than the benchmark returns, wait and watch where the market takes it.

Tax implication of mutual funds

Investors should choose to redeem their investment by considering the impact on tax. Mutual funds are high on liquidity and most of them do not have a lock-in period. One of the exceptions to this is the tax-saving Equity-Linked Savings Scheme (ELSS), which has a lock-in period of three years. The tax implications on the returns generated by mutual funds depend on the holding period of the fund. It also depends on the type of fund you are invested in. Equity funds are tax-free in case of long-term capital gain. If they are redeemed within a period of one year, it will attract short-term capital gain, which will be taxable at 15%. Further, non-equity funds will attract a tax rate of 20% on long-term capital gain with indexation if held for more than 36 months. If they are redeemed before the holding period of 36 months, they will attract a tax rate linked to the individual tax slab. In case of a long-term investment, the tax implication will be favorable for the investor.

Exit load of mutual funds

Mutual funds carry an exit load, which is a fee to be paid at the time of redemption of the fund. The exit load is a percentage of the Net Asset Value (NAV) and will apply only if you redeem funds before the completion of the holding period. Since equity funds are meant for long-term investment, they carry a higher exit load. Due to the exit load, the mutual fund returns will be reduced by the particular percentage of the load charged. Thus, investors should plan to exit the scheme in a way that will reduce the amount of exit load payable by them.

Applicable NAV of mutual funds

The value of mutual funds on redemption depends on the particular day’s NAV. The NAV for each trading day is declared at the close of the day. You must make your request for redemption by 3 PM on the same day. So make sure you study the market and the fund well before deciding to redeem it or hold it.

Every investor should be certain about the purpose of redemption. You should not be simply drawn by market sentiments. Instead, the decision to redeem and hold should be purely based on research and thorough understanding of the performance of the fund. For investors who have achieved their financial goals or are willing to invest in a different instrument, redemption will be an easy decision. If you are not close to your financial goal and have no other investment avenue, it is advisable to remain invested in the funds if the mutual fund returns seem to be positive.

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