Money-Wise: Planning to redeem your mutual fund units? What every Indian investor should know

Have you invested in the mutual funds and are you now planning to redeem some units or the entire amount? Mutual fund investments have been popular among the working class, however, some little tricks and smart steps while investing or redeeming can actually make the investment more wiser and profitable.

Mutual fund redemptions are taxable. Here's how

If you have decided to redeem your Mutual fund units after looking at the current value of your fund based on the latest NAV (Net Asset Value), then it is important to understand that it is not the final amount you will get after redemption.

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Mutual fund profits are taxable and exit loads are applicable on the redemption of the fund units.

In the case of Equity-based Mutual Fund investment, if you have decided to redeem the investment in a period of less than a year, you will be required to also pay short-term capital gain tax.

Meanwhile, there is a 15 per cent tax rate applicable on capital gains in any equity fund if it is redeemed before a year. If the redemption takes place after a year, then an LTCG tax of 10 per cent is required to be paid on returns of Rs 1 lakh (approx. $1195) or more in one financial year.

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In the case of debt-based Mutual Funds, short-term gain tax is calculated as per the income tax slab and the investment gains beyond three years are taxed at 20 per cent. Also, cess remains applicable over and above the tax rate.

The exit loadapplicable differs for every fund and can range between 0.5 per cent to 1 per cent, which is calculated on the total amount withdrawn.

When is the right to redeem mutual funds?

You may consider redeeming mutual fund units if the fund is not performing well and has a below-par performance, which can be assessed by observing the performance of SENSEX or NIFTY50.

In case there is any financial emergency or you wish to change the investment strategy, the redemption of units can be considered. Also, if you started a mutual fund with a financial goal which has been accomplished, you can plan a redemption.

It is important to check whether all units of your mutual funds can be redeemed or not or if is there any lock-in period applicable to them, which is generally the case with the ELSS (Equity Linked Savings Scheme).

What is the most accurate time to order redemption of units?

In the case of mutual funds, it is important to understand that when you order the redemption of units is very important as it will determine the NAV applicable and hence will affect the entire value of the fund and the capital gains made through it.

To understand this, one first needs to know the cut-off timing decided by SEBI and the NAV applicable to funds according to it.

For liquid funds, if the redemption is ordered after 1:30 pm (local time), the same day's NAV is applicable and if it is before 1:30 pm (local time), the NAV of the day before is applicable.

In equity and debt funds, the cut-off time is 3:00 pm (local time). If redemption is ordered before 3:00 pm, the same day's NAV is applicable and if it is ordered later the next day's NAV. However, the rule is applicable on redemption requests of less than Rs 2 lakh (approx. $2390.59).

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So, if you are observing the stock market and seeing a surge in SENSEX and you do not wish to take any more risk, 2:00 pm (local time) becomes the best period to redeem your units.

This is because NAV is calculated on the basis of the prices of the portfolio's securities once the stock market closes.

The stock market trend at 2:00pm (local time) is likely to remain the same when the closing bell goes at 3:30 pm (local time) and this will directly impact the value of your units and the net capital gain you make at the time of redemption.