When is the right time to redeem your mutual funds?

It is crucial to regularly monitor your portfolio, as frequently as possible, to stay on top of its performance

Deciding when to redeem mutual fund investments can be tricky. Understanding the right time for redemption is crucial to maximise returns and achieve financial goals. Economic indicators and fund performance can also provide valuable insights.

 

“Redeeming mutual funds is a strategic decision influenced by both personal financial goals and market conditions. Market corrections can present opportunities to rebalance portfolios at lower prices, while extended rallies might warrant reassessing risk exposure. Economic indicators and fund performance can also provide valuable insights. However, market timing can be challenging, and past performance is not indicative of future results. Consulting a financial advisor can help you make informed decisions,” said Sonam Srivastava, Founder and Fund Manager at Wright Research (SEBI Registered Portfolio Management Services firm.

Anil Rego, Founder and Fund Manager at Right Horizons PMS, a SEBI registered portfolio management services firm, explains key points to keep in mind to get good returns.

 

Goal-based redemption: If your mutual fund investment is for a specific purpose, like buying a house, paying for education, or retiring, you should think about selling the funds when you reach that goal.

Bull market: Redeeming during a bull market can help lock in significant gains. However, markets are cyclical, and predicting the peak can be challenging.

 

Bear market: If the market is in a downturn, avoid redeeming unless necessary to prevent selling at a loss. It’s better to wait for the market to recover.

 

Overvaluation: Investors must look out for overvaluation in a specific sector or market to time the exit and avoid possibility of reduction and preserve the grown capital.

Portfolio imbalance: As some investments outperform others over time, your portfolio might shift away from its initial balance. If one asset type becomes too dominant, selling some mutual funds can help restore your portfolio to its intended risk level and investment mix.

Changing risk tolerance: As you near retirement, you might consider selling mutual funds and reinvesting in lower-risk options, such as bonds or money market funds, to protect your wealth.

Emergency situations: Unforeseen circumstances, such as job loss, medical expenses may necessitate redeeming mutual funds earlier than planned. In such cases financial necessity takes precedence over market conditions or tax implications.

Consistent underperformance: When a mutual fund consistently underperforms its benchmark or similar funds, it may be wise to sell and invest in a better-performing alternative.

 

Investment strategy: Alterations in a mutual fund’s management or investment strategy can affect how it performs. Such changes might suggest it is time to reconsider your investment and possibly redeem it.

 

Tax implications: Understanding the tax consequences of redeeming mutual funds is vital. Short-term capital gains (STCG) tax applies to investments held for less than a year, while long-term capital gains (LTCG) tax applies to those held for over a year.

 

How to redeem mutual fund units?

You can redeem mutual fund units via online or offline.

Offline redemption:

 

Visit the AMC office: Go to the office of the Asset Management Company (AMC).

 

Fill out the redemption form: Provide the required details such as:

 

   - Unit holder’s name

 

   - Mutual fund scheme name

 

   - Folio number

 

   - Number of units or amount to be redeemed

 

Submit the form: Sign the form and submit it to the AMC office or authorised location.

Online redemption:

 

Log in to the AMC’s portal: Visit the official website of your mutual fund house and log in using your folio number and PAN.

 

Generate a redemption request: Navigate to the redemption section, choose the number of units or amount to redeem, and submit the request.

If you have purchased mutual funds through a demat or trading account (via a bank or broker), log in to the relevant app or portal and follow the redemption process there.