5-point guide to redeem and switch mutual fund units

Investors appreciate the benefits ofinvesting in mutual funds. However, when it comes to either redeeming or switching the units, they are often found searching for a defined strategy.

Here is a 5-point guide to help investors redeem and switch mutual funds units successfully:

1. Check for exit load and capital gains¬

Any investor wishing to redeem money is likely to be very upset if he must forfeit his money over unnecessary charges and avoidabletaxes.

Hence the first thing to ensure when you are selling/switching mutual funds is whether there is any exit load. If there isn’t, you can proceed with the redemption. If there is, consider waiting out the load period.

Likewise make sure you are not paying taxes on redemption by virtue of clocking short-term gains. Short-term gains are usually added to income and taxed as per the marginal rate of tax. This proves expensive for investors in higher tax brackets. If it’s feasible wait it out, since long-term gains are taxed at 20% with indexation benefit. This reduces taxable profits.

2. Is your mutual fund an underperformer?

Keep tabs on your mutual fund investments. If you find it lagging the benchmark or peer group, it may be time to re-consider its role in your portfolio. Sell it when you are sure it’s not working out and re-invest in a comparable investment that is performing decidedly better.

3. Have you reached your targeted goal?

Since you invest money towards a goal, it is logical to consider selling when you have reached the goal, like your daughter’s marriage for instance. If you have reached your goal earlier than expected - meaning the marriage is still a few months away - then consider switching into a lower risk investment like a liquid fund to keep money safe and handy.

4. Re-balance your assets

When stock markets run up sharply, your asset allocation tilts precariously towards equities. This makes your portfolio equity-heavy and exposes you to increased risk, particularly during market volatility.

It’s therefore a good idea to re-balance your portfolio at regular intervals, of say 12 months. Redeem portions of mutual funds that have clocked sharp gains and re-invest the same in another fund so that your asset allocation stays in tune with your risk profile and objectives.

5. Change in mandate

It’s not uncommon to find mutual funds changing their investment mandate either to improve the scheme performance or out of compulsion post-merger with another fund house.

You must re-evaluate whether it still makes sense to continue with the fund in the new avatar.

If not, redeem the mutual fund.

A selling strategy forms an integral part of the financial planning process,as much as the buying strategy. It may even be argued that without a good selling strategy you might well be robbed of the gains from your buying strategy. So keep an eye on the redemption checklist while you are evaluating your mutual fund investments.

Disclaimer – This document is for general information only and does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this information. This document provides general information on performance; financial planning and/or comparisons made are only for illustration purposes. The data/information used/disclosed in this document is only for information purposes and not guaranteeing / indicating any returns. This material provides general information and comparisons made (if any) are only for illustration purposes. Investments in mutual funds and secondary markets inherently involve risks and recipient should consult their legal, tax and financial advisors before investing. Recipient of this document should understand that statements made herein regarding future prospects may not be realized. Recipient should also understand that any reference to the indices/ sectors/ securities/ schemes etc. in the document is only for illustration purpose and should not be considered as recommendation(s) from the author or L&T Investment Management Limited, the asset management company of L&T Mutual Fund or any of its associates. Recipient of this information should understand that statements made herein regarding future prospects may or may not be realized or achieved. Neither this document nor the units of L&T Mutual Fund have been registered in any jurisdiction except India. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

CL05042