Mutual fund investments have grown rapidly in recent years. Association of Mutual Funds in India (AMFI) recently revealed that in equity investment, a whopping 51% of the assets get withdrawn in under one year, and only 29% remain invested for longer than two years.
So while a tremendous number of new investors have come to the mutual fund marketplace recently, a very large number of them are in a hurry to pack off with their gains. This makes us wonder what the ideal time frame for a mutual fund investment is. Let’s take a look at some other questions you should ask yourself before liquidating your investment.
Every mutual fund invests as per a theme, in a variety of securities such as equity, bonds, and gold. Check the theme of your fund. What is it most suited for?
For example, a liquid fund or a short-term mutual fund is most suited to park your money in low-risk, low-return securities for a few days or months. If you’ve invested in a hybrid fund that invests in a mix
of debt and equity securities, you can remain invested longer—for example, two to three years. If you’re investing in an equity fund, then for best results you should have a long-term outlook, ideally three years or longer.
When you liquidate your mutual fund investment, you must pay taxes on your capital gains. Consider the tax impact before you redeem your fund. From this perspective, your scheme is either in a debt fund or an equity fund. Your profits qualify as either short term or long term. A debt fund investment is short term for three years from the investment date, and your Short Term Capital Gains (STCG) are taxed as per your income tax slab. After three years, your Long Term Capital Gains (LTCG) are taxed at 20.6% with indexation benefits.
On the other hand, an equity investment remains short term for one year from the date of investment, and the STCG is taxed at 15.45%. On April 1, a new LTCG rule on equity investment came into force, where long-term gains above `1 lakh are taxed at 10.3% without indexation, while gains before April 1, 2018 have been grandfathered. If your investment is via an SIP, your units are redeemed on a first-in-first-out basis and their tenures are decided as per the dates on which they were purchased.
If you have invested in a fund that’s performing below your expectations, is lagging its peers, or is not able to beat its benchmark, you have a genuine reason to exit your fund. If you keep investing in such a fund, your long-term wealth creation plans may be hampered. Be sure that the fund has been a regular underperformer and isn’t merely going through a tough phase, which all funds do. You can either liquidate the fund, or consider switching to a better performing scheme with the same fund house.
Remember that you don’t need to liquidate your own mutual fund investment at once. You can redeem small amounts as per your immediate cash requirement. If you have a large mutual fund corpus—such as a retirement fund— you now want to redeem it via an SWP (Systematic Withdrawal Plan), which is the opposite of an SIP. Every month a fixed amount or a fixed number of units are redeemed from your fund and enchased. This way, the rest of your units remain invested and continue to earn compounded returns.
The writer is CEO, BankBazaar.com