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When to Sell/Redeem Mutual Funds

by Tavaga Invest

What are mutual funds and how do they operate?

A mutual fund is an investment vehicle that collects funds from a number of people to buy various securities. The funds pooled are then invested in a variety of financial securities, including stocks, bonds, gold, and money market instruments depending on the investment objective of the fund. Each investor receives a proportionate share of the income earned by the fund. Mutual funds might be considered a great option for investors because of the ease of usage and the benefits they provide.

Classification of Mutual Funds

Mutual funds can be divided into various groups depending upon the definite goal of the investor. 

  • Based on Asset Class 

Invest at least 65% of funds in equity or instruments related to equity.
High-risk funds, considered suitable for investors with a high-risk appetite and who are willing to invest for a long period.
Invest at least 65% of funds in securities like corporate bonds, government bonds, and money market instruments. 
Suitable for investors with a low-risk appetite Provides stable and regular returns.

Investment in both equity and debt funds.
They help reduce the investor’s risk and boost returns.
Hybrid equity: Invest more than 65% in equity. Hybrid-debt: Invest more than 65% in debt funds.

Traded on the stock exchange and track a particular index, sector, commodity, or any other asset.
Do not have any lock-in period.
Low cost and less risky as it holds a basket of securities. 
  • Based on structure
These are highly liquid funds as they allow investors to buy and sell funds anytime in the market at their Net Asset Value (per unit purchase price)
A combination of both open-ended and close-ended funds whereby investors are allowed to buy or sell funds only at certain pre-defined time intervals
Close Ended
Has a pre-defined lock-in period of 3 years i.e., they cannot be redeemed before 3 years. These funds have low liquidity

Based on the Investment objective

PurposeInvest a sizeable amount of their capital in stocks and growth sectors to gain high returnsInvest a considerable amount in bonds, debentures, government securities, etc. to generate regular incomeInvest in money market securities such as commercial papers, CDs, term deposits, and Treasury Bills with a tenure of 91 daysCommonly known as Equity Linked Saving Scheme (ELSS) these funds allow a tax rebate of up to Rs. 1.5 Lakh/year under Income Tax Act. Invest majorly in equities and equity-related products
Investment HorizonLong termShort-termShort-termLong-term, Lock-in period: 3 years

Ways to invest in mutual funds

  1. Mutual Fund Distributor: AMFI registered Mutual fund distributors assist investors with mutual fund transactions and offer financial advice. They do not charge investors any fees as they receive commissions from the respective fund house
  2. Asset Management Company (AMC): One can invest directly with AMC either by visiting their office or through their website. Every new investor must submit the KYC documents to buy the regular and the direct plans. Direct plans have a low expense ratio and give higher returns than regular plans
  3. Registered Investment Advisors (RIA): People can also make investments with the help of SEBI Registered Investment Advisors. There is no commission charged by the RIA from the Asset Management Companies (AMC). RIA may charge fees from investors for providing the services for making an investment
  4. Registrars and Transfer agents (RTA): Mutual fund transactions are handled by the RTA on the behalf of fund houses. The advantage of investing through RTAs is that people can execute transactions (investments, redemptions, switches, etc.) involving several mutual funds from various AMCs, provided that the AMCs in question are served by the same RTA
  5. Banks: The majority of banks provide wealth management services for investing in mutual funds. People can make investments in regular mutual fund plans through banks
  6. Brokers: People can also make investments in mutual funds with the help of brokers/distributors who are authorized to sell the mutual fund schemes. They charge fees for providing guidance and act as an intermediary in process of buying and selling the funds.

Costs associated with investing in Mutual Funds

  1. Total Expense Ratio (TER): It is the total annual fees charged by the mutual fund scheme which includes management fees, administration, and distribution fees. For example, if a person invests Rs.10,000 in a fund and the expense ratio is 3%, this means that a fee of Rs. 300 is charged annually for the management of the funds.
  2. Entry load: 2.5% of the amount invested was earlier charged by the fund houses at the time of investing in mutual funds which were discontinued as per the SEBI guidelines on August 01, 2009.
  3. Exit load: It is the fee levied on investors by the fund houses for selling the funds before the lock-in period ends. This charge was introduced to make people stay invested for at least the lock-in period. in a short time. Depending on a defined holding period, different fund houses impose different exit load fees.
  4. Transaction fees: It is a small fee charged by the intermediaries/distributors once during an investment. On transactions worth Rs. 10,000 and beyond, a transaction fee of Rs. 150 can be imposed on new investors and Rs. 100 on current investors. No transaction charge is assessed on investments under Rs. 10,000. 

When to sell/Redeem Mutual funds

When it comes to selling or redeeming mutual funds, there is no optimal or favorable time to sell the mutual fund. Unlike stocks, mutual funds are diversified instruments with a basket of securities, there are various scenarios to consider before selling the mutual funds.

  1. Changes in Fund: Every mutual fund has an objective, asset allocation, and risk associated to identify which mutual fund is the best fit for the investor’s goals. In case the fund manager changes the objective at any time, investors can opt to exit the scheme if it does not match their investment plan
  2. Changes in Fund Manager: The performance of the mutual funds is highly affected by the fund manager’s approach. In case the fund manager is changed, the performance of the funds should be tracked. If the approach used by the fund manager is not satisfactory then it is the right time to look for redeeming the funds
  3. Constant underperformance of fund: Mutual funds are subject to market conditions, in case the funds are constantly underperforming along with the drop in other similar similar schemes, then after analysis, investors can either wait for sometime in hopes that fund will give better returns or consider redeeming the investment
  4. Fulfillment of financial goals: Some investors invest in mutual funds to fulfill a particular goal. Once the goal is achieved, they tend to redeem the investment. For example, if a person invests in mutual funds with the aim to buy a bungalow, he/she can redeem the investment once the required corpus is met
  5. Portfolio Rebalancing: Mutual funds are often redeemed or replaced with other funds in order to match the risk-reward framework of the portfolio to that of the investor.
  6. Emergencies: The majority of mutual funds do not have a lock-in period, which makes the investment liquid. The investors can redeem the mutual funds anytime in case of any emergency
  7. Change in investment preferences: Investment is the journey that lasts a lifetime. The preferences of the investors are likely to change with time, let’s say a person willing to take a high-risk today in order to get high returns might not be comfortable taking risk after years, and is satisfied with the lower returns. In this case, they should consider selling the high-risk mutual funds

Applicable taxes when redeeming Mutual Funds: 

  1. Capital gain Tax
ClassificationLong-term capital gainShort-term capital gain
Equity funds/ Hybrid-equity fundsHolding > 12 months
Up to 1 Lakh – 0%
Above 1 Lakh – 10% + cess and surcharge
Holding < 12 months
Under Section 111A – 15%
Not under Section 111A – As per investor’s tax slab
Debt funds/ Hybrid-debt fundsHolding > 36 months – 20%+cess and surchargeHolding < 36 months – as per investor’s income tax slab rate
  1. Tax on dividend
CategoryTax Rate
Resident Shareholder10% (without providing any deduction under the Income-Tax act)
Non-resident Shareholder20% (without providing any deduction under the Income-Tax act)
  1. Securities Transaction Tax (STT): It is the tax that is charged by the Ministry of Finance on each transaction either buying or selling of equity or hybrid-equity mutual funds. This tax is not applicable to the debt funds. The STT charged on each transaction is 0.1% of the sum value of the transaction.

Conclusion: It is advisable for people to carefully evaluate the inherent risk, expected return as well as the taxes/charges associated with the particular mutual fund before investing as different mutual funds cater to different time horizon and risk appetite. The mutual funds should be sold or redeemed only after performing a thorough and detailed research or once the investment objective is met.

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