Not so long ago redeeming mutual funds was a long and hectic process. You needed to go to a branch and fill lengthy forms for liquidating your investment. Over the years the process has, however, become much simpler. You no longer need to visit a branch, as funds can now be redeemed just at the click of a button from the comforts of your home. But in the hurry of redeeming your mutual fund scheme don’t forget to consider a few rules framed by Securities and Exchange Board of India (SEBI) and Income Tax Department that can have an impact on your investment.
By knowing about these rules in advance you can not only time your application right but also get the maximum out of your investment. Not to mention investments in mutual funds should always be goal-oriented. One should consider redeeming funds only when the objective gets accomplished.
Here are 4 important questions for you to consider before redeeming your mutual fund investments so that you make the most of your money:
What day is it?
The settlement cycle in the case of equity mutual funds is T+3 days. But do you know if you submit your application for redemption towards the end of the week, i.e on Thursday or Friday, then it might take two days extra before the money gets credited into your account? Yes, this is because if the funds are redeemed it takes trade day plus 3 days (T+3) for the funds to be added to your bank account. Note that weekends and public holidays are not included.
For example, if you sell an equity fund scheme on Thursday then the mutual fund companies will maximum credit your money by Tuesday because of a weekend between the settlement days. If, however, you do the same transaction on Monday then the money will be credited within 3 days on Thursday. Hence it is advisable to submit your application at the start of the week so that your money gets credited without much delay. Remember, if there is a holiday between the settlement days then, the settlement date will shift to the next working day.
Similarly, in case of debt funds the settlement cycle is T+1 days. For example, if you sell a debt fund scheme on Friday then the settlement date for this transaction will be Monday. If you redeem on Monday, then the money will get credited to your account by Tuesday. So you know by now how the selection of the day can affect the speed of money travelling to your account. Hence always ask what day it is today before clicking on the redemption button.
What time is it?
Do you know for equity mutual funds what’s the cutoff time to get the same day’s unit price or Net Asset Value (NAV)? It is 3 pm. It means that if you place an order before 3 pm, it will process your transaction at the same day's NAV. If you delay and place it after 3 pm then your transaction will be processed at the next day’s NAV. Similarly, for liquid and overnight funds, the cut-off time has been 1.30 pm. If you sell it after 1.30 pm, then the subsequent day’s NAV will apply. Hence if you plan to make sure you sell the units after considering the cut off time to get the desired NAV.
How long did I stay invested?
Do you know apart from the nature of the investment, the holding period or the tenure during which you stayed invested also decide the tax rate applicable on mutual funds? It is, therefore, important to understand whether you held the units for a long term or a short term period before going for redemption of units.
First, what is long term? If you redeem the units of equity funds after one year from the date of allotment then the investment is defined as long term. The capital gain arising from units held for more than one year is called long-term capital gain (LTCG). Similarly, a capital gain from redemption of an equity fund within one year is known as short-term capital gains (STCG). In case of debt funds, if you sell the units before 36 months then it is considered to be short term and if you hold them for more than 36 months is considered as long term.
The short-term capital gains on equity funds are taxed at the rate of 15 per cent. Earlier, the long term tax on equity mutual funds was tax-free but with effect from Budget 2018, the long-term capital gain on equity fund is tax-free only up to Rs 1 lakh. For the amount in excess of Rs 1 lakh the tax rate is 10 per cent without the benefit of indexation.
In case of debt funds and foreign funds like the USA, Japan or Taiwan funds, which can be either Fund of Funds (FoF) or direct funds, the long term capital gain is taxable at the rate of 20 per cent with the benefit of indexation. The short-term capital gain from debt funds is added to the total income and is taxable according to the income tax slab of the person.
Is there an exit load?
Last but not least consider exit charges. If you exit from equity funds in less than 1 year then it attracts 1 per cent exit charges. In the case of debt funds, exit load is nil in short-term funds such as ultra-short duration and liquid funds but can be levied in funds with low liquidity such as credit risk funds.
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