Thread: correct time to redeem mutual funds

Hi,

As like other ppls I am also confused about the best time for redemption of MUTUAL FUNDS. Many sites/ppl suggest if you don't need money right away then stay in market for long term say 2/3 yrs.
But my thinking is different. even i don't required the money right now , but if within a short period it gives me 80% return, why should not i redeem. Suppose after 1 or 2 yr, sen sex again down like previous yr then i lost my good return. So why we should not consider the return % as a redemption decisions

Thanks

Uncleji

Well, you should at least wait a year so as not to attract short term capital gains; else you will have to pay 10% on the accrued gains.

But even if you are willing to pay the 10% tax ....

While it is true that one need not wait for 3/4 years, it is unlikely that you will get 80% gain in the short term. To achieve this, you will have to buy like anything during the dip but:

- you don't know what it the final trench of the dip; do I buy now or wait for further dip?
- you willl be unlikely to buy because the sinking of share market will copulate with the dip in the capital market; money will be hard to come buy and you will not be attracted to invest

Finally, Mutual funds do not yield 80% in the short term. Equities do but mutual funds, rarely. The typical mutual fund yield (during good bull run) is 15-20%, year over year.

There could be exceptions. In that case there is no harm in booking profits.

If you sell any Equity/Mutual Fund investment before completion of 12 months from the date of purchase, the incremental value received becomes taxable under short term capital gains(STCG).

As per the provisions of the Income tax Act, STCG gets added to your total taxable income and is taxable at the marginal tax rate. i.e. if you are in the 20% brcket then you will be required to pay tax on STCG @ 20% and if you are in the 30% bracket you would be required to pay tax @ 30% on the STCG.
So it is better to wait at least 12 months.
Further, most mutual funds generally incorporate higher exit loads in the initial months, so you might not get the real value of your investments.

As J4K already indicated, Mutual Funds rarely give returns beyond 20% in the first year. This is more so because the fund management costs are loaded to the fund more in the first year.

Is it better to invest with dividend pay out option or growth option?

In dividend pay out option you are hedging the risk of future slumps in the market, by opting to pull out a part of the increase in value. In growth option you are choosing to take the risk in the hope for increase in the market in future.

the choice depends on individual's willingness to take or hedge the risk

Originally Posted by panchabhut

In dividend pay out option you are hedging the risk of future slumps in the market, by opting to pull out a part of the increase in value. In growth option you are choosing to take the risk in the hope for increase in the market in future.

the choice depends on individual's willingness to take or hedge the risk

Thanx for the clarification!

Its a very difficult call if you have made 80% but my openion is that this market will not see a fall so intense as last year in the next 4-5 years or atleast before a major bull run which is waiting to happen... I actually believe that we are at the begening of a greater bull run tht we saw before this recession kicked in.

It also depends on what you are going to do with the money you take out... Do you plan to invest in debt instruments or something? equity will still pay you more then double the growth rate of our country which is going to be around 7% so I believe that if you invest in one of the indexes you would end up making more then 14% if you are invested in equities... debt instruments wont beat equities now as we are ahead of the bottom and the bottom formation was a solid one not to be broken unless we have something like a indo china or a indo pak war whcih seems highly unlikely at the moment...

End of the day its your money and you are the one who needs to take a call... I am not expert and I suggest you keep these things in mind but also consult some one who is an expert

Thanks you all for replies