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Sunday, 24 June 2018

When should we redeem our mutual fund investment?

Mutual funds reclassification, rising crude oil prices , trade war worries and a falling rupee have taken toll on mid- and small-cap stocks. some of my friends and clients calling me and asking that should we withdraw our money out? Just falling market should not be the only reason for Exit. When we do start any investment or SIP, it is for a Goal. Market cant move northwards only. It has its own cycle. We all have seen the financial market crash in 2008 and we have also witnessed the recovery it had shown. Who have exited at that time, have exited with loss but who didn't have, earned tremendous return on their investment.




So when should we redeem our mutual fund investment? We must ask following question to ourselves before redemption:

Is my Goal Achieved? : Every investment must have some goal. it would be a very wise decision to exit from then equity investment when you reach near the goal. It will be better to start SWP (Systematic Withdrawal plan) to come out from your investment from equity and keep the proceeds in some fixed asset.

Is my fund is under performing its class or benchmark? : If you fund is under performing its peers and benchmark for one  or two or years consistently then you can switch to some other fund as per your requirement and goal. Many new investors are betting big on small cap schemes. They believe that they will make them rich quickly. and as soon as market turns south word they become impatient. Mostly people compare the fund return with Nifty or Sensex. it is same as comparing Apple with Orange. Investors must compare fund with correct benchmark.

Is the re-balancing required? : Risk profile of any investor can change with time. If someone, having balanced profile, have invested any mid cap fund which have outperformed the market then he can think to redeem some part of investment and move it to Fixed Asset. It can also happen that, fund have changed its investment strategy due to which it does not fit into someone portfolio, then he can exit from the fund.

What is the tax implication? : Investors must consider the exit load before redemption. After the long term capital gain, we need to plan the exit according to your tax bracket. From April 1, LTCG made on transfer of equity mutual funds that have an equity exposure of 65 per cent or more will have to pay a 10 per cent tax on long-term capital gains above Rs 1 lakh a year. This new tax will apply in any financial year whenever there is LTCG on redemption of equity MF, if you have held those units for at least 12 months.


Investors need to remind themselves that investing regularly in a good scheme which suites their risk profile, over a long period is the only way to create wealth.

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