Things To Remember Before Redeeming Equity Mutual Fund Units

Investments in equity funds can potentially grow your wealth substantially in the long run. However, investors must know when and how to redeem units from these funds. Understanding the right time and method for equity fund redemption can impact investment outcomes.

Whether you are looking to reallocate funds or cash out for upcoming expenses, understanding the redemption process can ensure that you choose strategically.

This article takes a closer look at when and how to redeem equity investments.

• Table of contents

1. Key points to remember when redeeming equity funds
2. Mutual fund redemption process
3. Other strategies to manage your equity portfolio

Key points to remember when redeeming equity funds

Don’t withdraw in panic: Don’t redeem units or exit from a fund solely because the market is in a downturn. Equity markets tend to be volatile in the short term but have historically stabilised and grown over long horizons. So, if your financial objectives are several years away, you might tolerate short-term market volatility better than someone nearing their financial milestone.

Give your investments time: The compounding effect on your investments gives them the potential to grow over time. This is especially so with equity because it is more susceptible to market volatility. So, if the return on your investment is below your expectations in the first year and your investment horizon is several years, do not rush to exit. Instead, compare your fund’s performance to its benchmark and other funds in the same category. If your fund is consistently underperforming relative to these, you may want to examine if the fund manager’s strategy is the problem. In such an event, you may seek to switch to a different scheme in the same category.

Don’t withdraw on impulse: For disciplined investing, it is important to form and stick to a goal. Create a separate corpus for emergency funds or unforeseen expenses so that you can avoid dipping into your long-term investments when a financial requirement crops up.

Check tax implications: Be aware of the tax liability that comes with redeeming equity funds, as gains for most schemes are taxable. Long-term capital gains may attract lower tax rates compared to short-term gains, so consider the holding period of your investment to potentially reduce tax liabilities.

Check exit load: Check if there are any penalties for early redemption of equity funds, as some funds charge an exit fee if redeemed before a specific period. This fee can significantly impact your returns, especially if you withdraw funds soon after investment.

Check the NAV at the time of redemption: When you redeem your units, the amount you get will depend on the Net Asset Value or NAV. If you request successfully goes through before 3 pm on a business day, your NAV for that day will be used for calculating your returns. If not, the next day’s NAV will be used. The NAV can fluctuate from one day to the next.

Mutual fund redemption process

Equity fund redemption refers to the process of converting your units in equity funds into cash. To start the redemption process, an investor submits a request to the fund house. This can usually be done online through the fund's website or through a financial advisor. Once the request is processed, the value of the units based on NAV at the time of redemption is transferred to your bank account. The time taken to complete this process varies, but typically takes a few business days.

Other strategies to manage your equity portfolio

Assess performance: Regularly review the performance of the equity funds to decide if they meet your expectations. Continuous monitoring helps identify underperforming funds early, allowing you to switch strategies or reallocate resources to optimise returns.

Diversify: Reduce risks by spreading investments across various types of equity funds. For instance, a small cap portfolio with high growth potential but high volatility can be supplement by a large cap fund and debt investments for relative stability. Diversification minimises the impact of poor performance in one area by balancing it with stronger returns in another, providing a more stable overall portfolio performance.

Consult an expert: Seeking advice from a financial advisor can provide insights into when to invest in equity funds and when to exit. Other strategies to manage your equity portfolio

Conclusion
Redeeming equity funds requires careful consideration and strategic planning. By understanding the equity fund redemption process and following these equity fund redemption tips, investors can effectively manage their portfolio and achieve their financial objectives.

FAQs

What is the difference between redemption and selling equity funds?
Redemption involves withdrawing your investment from equity funds and receiving proceeds. The term selling may also be used in that context.

How long does it typically take to redeem equity funds?
Each scheme may have a different timeline, but it can take about 2 business days after the request is placed for the equity fund redemption process to be completed and the funds to be credited to your account.

What factors should I consider when deciding to redeem equity funds?
Consider market conditions, your financial goals, performance of the funds, and any associated fees or tax implications.

How does redemption of equity funds affect my tax liability?
If you have earned returns on your equity fund at the time of redemption, you will be need to pay tax on the capital gains. The tax rate depends on how long the funds were held. Short-term capital gains (for funds held for less than a year) is 15%. Long-term capital gains (on funds held for more than a year) is 10%.

Are there any penalties for early redemption of equity funds?
Some equity funds charge an exit load if you redeem your investments before a certain period. This period is typically six months to a year from the time you made your first investment. The exit load may be 1% to 2% of the Net Asset Value or NAV of the redeemed units.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.