Be wise while redeeming mutual funds to prevent losses

Just as Box Office is nerve-racking for Bollywood, similarly movement in Dalal Street can bring either delight or wrath of the investors. When market is on the upswing, everything remains fine with the investors who splurge their money around. But when things go awry in the market, investors tend to get jittery and press the panic button. As a result, they offload the investments and end up burning their fingers. So, the right solution here would be not to pay much heed to the upswing and downfall of the capital market. Instead, you should focus on the goals of your investments.

Aligning with the title of the article, we will keep a firm focus on mutual fund investments. Most of the people run misconception that mutual funds are same as stocks. But, reality is that mutual funds are different than stocks, and are a portfolio of well researched, hand-picked stocks. In case one stock plunges, the others in the portfolio compensate for the losses. Qualified fund managers carefully shuffle the investments across stocks, bonds, money market instruments to minimise the risk. Always go for mutual funds with a long-term approach as then only you will stand to benefit in true sense. Going with the short-term approach and redeeming mutual fund investments early can cause a barrage of losses for you to deal with. Here are some of the points that you must consider while redeeming your mutual fund investments to stay immune from the losses that can mount otherwise.


The returns you get from mutual fund investments do attract capital gain tax, the amount of which can vary depending on the time for which the investments were held. You can be free from capital gain tax for holding your investments on equity mutual fund schemes for over a year. But, if you redeem them before a year, capital gain tax at 15% plus surcharge and education cess, as applicable, will be charged. You can be taxed at 20% with indexation along with surcharge and education cess, if any, on redeeming non-equity funds after 3 years of holding them. On redeeming these investments before the said period, tax rate as per the individual tax slab will be imposed. The highest tax rate would be 30% of the capital gain along with applicable surcharge and education cess on non-equity funds. Fund houses do not deduct the tax at source on the redemption of mutual fund units. You need to pay the taxes yourselves only. Fund houses also charge Dividend Distribution Tax (DDT) of 25% plus surcharge and education cess, if applicable, in debt fund schemes. However, equity mutual fund schemes are exempted from DDT.

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Exit Load

Exit load is a type of fee that you will have to bear on redemption of the mutual fund units before a specified period. If you do redeem before the stipulated period, you will have to pay an exit load at a certain percentage of NAV or varying amount over different holding periods. So, a scheme may bear 2% exit load for redemption within 3 years and Nil after that, or a 3% in a year, 2% within 1-2 years, 1% after 2 years. Therefore, you must plan your redemption accordingly so that you can avoid paying fully or majority of the returns as exit load. If the redemption is solely based on the market crash, then you are most likely to regret your decision in the future. Market may recover from the lows to scale a new peak, depriving you from the future gains. So, don’t be driven much by the upswing and downfall of the market.

Be careful in picking mutual fund schemes

Make sure you check whether the schemes are open-ended or close-ended before choosing them. Knowing this will let you know the pros and cons of redemption of your investments. There are certain schemes that do not allow premature withdrawal, such as Equity Linked Savings Scheme (ELSS), a close ended scheme, and Fixed Maturity Plans (FMPs). You can exit prematurely from such close ended schemes if they are listed on stock exchanges. But, you will have to contend with trading volumes, the price offered and the frequency.

Day of redemption

The time of submitting the applicable will decide the Net Asset Value (NAV) at which your mutual fund units would be redeemed. Same day NAV will be applicable if you submit the request before 3 p.m. Otherwise, next day NAV will apply. NAV of mutual funds gets decided on each day. And if the NAV comes out to be lower on the next day compared to the day of submitting the application, you may face loss on the redemption of mutual fund units.

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Now, you must have got to know about the charges and losses on early redemption of mutual fund investments. Redeem the investments when charges will be minimum or NIL. And above all, go with a long-term objective with mutual funds to extract maximum benefits.