 "Things to know before redeeming your mutual fund investment")
Investors choose mutual fund schemes after careful selection, on the basis of past returns and star ratings. These investments should ideally be linked to specific goals and not random ones. This helps investors stay calm during market swings and not give in to pressures to sell off in panic, like we saw on Monday when market had a historic crash.
While much is said about how to invest and things to bear in mind while doing it, very little is said about what to take care of while redeeming investments. This is an imporatnat aspect as invetsors could face exit barriers or taxation issues.
Certain schemes have a lock-in period, during which investments cannot be redeemed. Lock-in periods are a common phenomenon with tax saving Equity Linked Savings Schemes and Rajiv Gandhi Equity Savings Schemes. Investors should check if their investments come with a lock-in period.
On redeeming mutual fund scheme units the return earned is linked to the day’s net asset value (NAV). Only redemption applications received at the concerned service centers by the stipulated cut-off time would qualify for NAV of the same day. For applications received post that time the next business day’s NAV would apply. Apart from these, there are two other aspects investors should consider while planning redemption:
Taxation
The returns investors earn from mutual fund investments attract capital gains tax. This taxation actually depends on how long the investment was held. Long term investments attract lower capital gains tax than short term ones.
Equity mutual fund schemes are exempt from long term capital gains tax if the investments are held for more than 12 months. If they are held for 12 months or less, capital gains would be taxable at 15% (plus applicable surcharge and education cess).
Non-equity funds attract long term capital gains tax of 20% with indexation (plus applicable surcharge and education cess) if held for more than 36 months. If held for 36 months or less, the tax rate is linked to their individual tax slab. The highest tax rate would be 30% of the capital gains (plus applicable surcharge and education cess). Capital Gain taxes are not deducted at the source by the fund house when the units are redeemed. Investors need to pay it themselves.
When investors invest in the dividend option of a mutual fund scheme, the dividend distributed by the fund house is tax-free. However the fund house will deduct Dividend Distribution Tax (DDT) in debt schemes at 25% plus applicable surcharge and education cess. DDT is not applicable on the dividend declared in equity mutual fund schemes.
Exit Load
Mutual funds charge exit load - a type of fee, when an investor redeems units from the fund. Exit loads usually apply only until a certain holding period has been achieved in a particular mutual fund scheme. Generally equity schemes have exit load for longer durations – for the obvious reason that equities are meant for long term investments – compared to debt schemes and liquid schemes. In a way this serves the purpose of discouraging quick withdrawal from investments.
Exit load may be charged as a percentage of NAV either flatly or calibrated over various holding periods. Thus a scheme may charge 2% exit load for withdrawal anytime within two years and nothing after that, or charge 3% in year one, 2% if withdrawn between 12 months and 18 months, 1% between 1.5 and two years, and nothing after that. Investors should plan their scheme redemption in such a way that will help them avoid having to part with some of their returns as exit load.
Before investors redeem investments they should not forget to evaluate whether this is solely a sentiment driven urge based on market conditions, or the execution of a goal-based investment strategy. If it is the former, investors may be leaving open a door for regret in the future whereas if it is part of a strategy they wouldn’t be too bothered about market conditions.
The writer is Head- Customer Delight at Quantum AMC