Things to consider before you redeem your mutual fund investments

"Markets close at 20-month low", "Market crash wipes out lakhs and crores of investors' wealth," and many more such news items threw Vishal into frenzy. The optimism that was prevalent a year ago when he invested had vanished and he headed straight to his financial advisor.

"I want to withdraw my money right away," stuttered anxious Vishal. Offering Vishal a glass of thandai, the advisor asked him to calm down. He had faced such situations umpteen times and knew how to soothe Vishal's nerves.

He took him to another client Chandresh, who was readying a cheque for his next investment. The moment Vishal saw him signing on the cheque, he bombarded him with a flood of questions. "Investors like me are losing money and you are making fun of us by investing more," cried Vishal.

The advisor stepped in, "He isn't making fun of you. Years ago, he panicked just like you. But he learnt a lesson the bitter way. Inspite of recommending him not to sell when the equity markets cracked in 2008, he went directly to the mutual fund office and sold the units." He not just lost his money, but had to pay a hefty capital gains tax as he hadn't completed the one-year period for his equity MF investment.

Had he left them untouched then, today he would have been marrying his daughter off without any worries. He realised this when he saw the long-term returns on his investments that were left untouched.

"Vishal bhai, the market dips are akin to sale periods. Make the most of them," recommended Chandresh, who was investing for his grandchildren. "I forgot that mutual funds aren't stocks, but are actually a portfolio of well-researched and hand-picked stocks. As a result, when one stock tanks, another in the portfolio can offset the losses," Chandresh elaborated.

When should you actually press the exit button?

Vishal was in a dilemma. If adverse market conditions weren't the reason to sell, what is? His advisor explained that there could be only three reasons to sell units:
A. If one has met the goal he started investing for,
B. The scheme has changed the investment mandate, and hence doesn't fit well in his portfolio, and
C. Underperformance for years together, when peer schemes are doing well.

Many dread the shift of the star fund manager from a fund house and exit the prominent schemes anticipating poor returns, but that may not be the case always. Fund houses have set systems in place and change in fund manager would leave the fund uninterrupted.

If, however, you have to redeem mutual fund units, don't forget to consider the following:

Type of scheme
You cannot withdraw from select schemes such as equity-linked savings scheme (ELSS), closed-ended schemes and fixed maturity plans (FMPs) until the mandatory lock-in period has culminated. So, find which type of scheme have you invested in.
If the closed-ended scheme is listed on stock exchanges, you might be able to exit. However, you would be bound by the trading volumes, the price offered and the frequency.

Exit Load
Open-ended schemes don't have a lock-in period, but there are periods when a charge named exit load is levied if an investor sells within a specific period. Say for instance, exit load of 1% applicable on redemption within one year of investment, else nil. These differ with the schemes. So, if you have been charged a 1% load for redeeming within 6 months from fund A, doesn't mean the same would be charged for scheme B.
When you have invested by way of systematic investment plan, some units may have completed the period, while other may not have.

Timeline
If you need the money for a specified task, send the application keeping in mind the time taken to process your request. Typically, you would get the redemption amount three working days after you submit the request to sell your units.

Day
The net asset value at which your units from a mutual fund scheme would be redeemed would depend on the time when you submit the application. If you submit the request before 3 pm, then the same days NAV is applicable, else the next day's NAV would apply. Such minute time gap would impact your redemption amount if you were looking to cash in on equity markets gain on a particular day.

Taxation
Gains made under equity mutual funds don't attract tax if held for more than one year. Debt mutual funds are considered long-term if held of 3 years. Consider the taxation implication before redeeming.

Conclusion
Sticking to your goals and targets help you keep your emotions under check, especially during volatile swings of equity markets.
That said, always vet the scheme you are investing in as redeeming mutual fund investments mid-way would turn out to be remorseful as you would have to pay additional exit load, if applicable, apart from the taxes you would have to bear for not staying long enough.

(The situation and names used are hypothetical.)