When is it the right time to Redeem Mutual Fund?

When you consider buying a Mutual Fund Scheme, you weigh all the pros and cons and select a Scheme that is suitable to your needs. Similarly, when you decide to redeem your Schemeunits, there is a check list that needs to be completed in order to make an informed right decision. Many people believe that a bad market run is reason enough to redeem their Scheme-units and they do so without considering several other factors that can in fact help them get better returns.

Mutual Funds are not Stocks

One needs to understand that Mutual Funds are not synonymous with stocks. Which means that the general understanding that a declining market will yield lower returns on your MF Scheme, is in fact wrong. Stocks are single entities with rates of returns associated with what the market will bear. MFs are not single entities, they are portfolios of financial instruments such as stocks, bonds etc, which are selected on the basis of the type of Scheme. The single most important factor of a portfolio is Diversification; where a decline in one or two stocks within a portfolio can be offset by others. Therefore, concluding on the basis of market movement is not advisable because even your MF Manager takes proactive decisions and tries to factor-in the perceived market movements.

Have you achieved your Scheme target?

The first and foremost reason is to ascertain if your MF has served its purpose. Mutual Fund Schemes are taken with certain targets and goals in mind. One way to understand whether or not you should redeem your Scheme-units is to check if your goal has been achieved. It could be buying a car, your marriage, child’s education etc. If you feel that your investment has achieved its objective, then it can be redeemed. If not, you would much rather wait it out. Always keep in mind that every investment is for an end purpose. When that purpose is served, you need to liquidate your position and achieve that end purpose. Any sort of further will lead to speculation. And when your investment turns into a speculation, you have reasons to worry.

Do you need the money?

In dire states of requirement, when you need the money, redeem it. Call your broker and start the process of redeeming. The market may rise by 100% the following day, or fall by 50%. But none of that matters because when you need your money for a particular emergency/event, you have every right to get it back.

If you do not need the money urgently and can wait patiently till your goal is achieved, that is always advisable. Most people sell at a peak only because markets are at a high, not because their target has been achieved. When opting for this method, don’t just sell your MF and sit on your cash. When the market declines and starts rising again, you must invest again to cash in on the subsequent rally. If you are timing the market, you need to be clear about your exit points and re-entry points.

Process of Redemption

Redemption Process

AMC (Asset Management Company) or Distributors are the most common modes of investing in MFs on account of them being direct (offline). To redeem this, you need to send a duly signed redemption request to the AMC’s or the Distributor’s office. Your sign must be a perfect match to avoid any further delay or problems. You will have to fill a standard form which will ask for basic information like your name, phone number, plan and scheme details and number of units you wish to redeem. All the holders will have to sign the slip.


Important points to note:

NAV Applicability

The NAV at which your units will be sold depends on the time you submit your redemption request. If you submit your request before 3:00pm, the closing NAV of the same day will be applicable. However, if the request is submitted after 3:00pm, the following day’s NAV will be applicable.

Time to receive redemption proceeds

Once the request has been confirmed and processed, it takes up to three working days for the proceeds to be credited to your bank account.

Funds with a Lock-In period

There are certain funds that cannot be redeemed instantly unlike most others. Funds such as Equity Linked Savings Scheme (ELSS) comes with a minimum lock-in period. In such plans, the units can be sold only after the defined period (3 years) has elapsed, after which they can be sold like normal MF schemes.

Applicable Taxes

Your transaction might attract tax amounts and exit loads on the basis of the duration after which you redeem your investment. Make sure you inquire about all such sundry charges before you make your decision.

Selling a Mutual Fund isn’t something one does impulsively. Great amount of thought and planning goes into deciding the right moment of redeeming the units. It is always advisable to consult your Advisor before making any such decisions. However, if you have weighed all the pros and cons and decide to sell the Scheme-units, sell it and don’t look back.

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