6 Nov 2015

Withdrawing from Mutual Funds

Mutual fund sites should have a button that says Redeem When Free. This will do two things: First, wait for the time period when you no longer have an exit load [1].

Second, wait for the capital gains tax to reach zero. For an equity mutual fund [2], that’s one year.

For a debt mutual fund, that’s at least one year [3]. Beyond a year, capital gains are indexed. That is, inflation is taken into account to determine capital gains. If your fund gave you less return than the indexation factor, then you don’t need to pay capital gains tax. Mutual funds should take this into account and redeem your investment at a time when you don’t have to pay capital gains tax.

Redeeming when there’s no exit load or capital gains tax gives better returns to investors, so all mutual funds should offer it. And if you made multiple investments in the same fund at different times, each of them will have a different optimal time of redemption.

You can have investments redeemed automatically, or you can choose to be informed, via an email that says, “You can now redeem 100 units without taxes or load.” That way, you can still make a choice before the redemption.

These are the kinds of things computers can do easily, and it’s backward that fund houses have computerised everything without adding such smart features. Their web sites are dumb, doing little a person couldn’t do manually. It’s some for some smartness.

[1] Though the ideal solution is to get rid of the exit load. It’s also anti-competitive because it incents you to stick with the same fund instead of moving to a competitor. There should be no reason for having multiple fees: an annual expense ratio AND an exit load. Pick one. In general, I dislike products or services that have multiple fees.

[2] Remember that a mutual fund must invest at least 65% of its assets in Indian equities to count as an equity fund, under the law.

[3] Before one year, you’ll be taxed at your marginal rate, which is 30.9% for many of us. Needless to say, you absolutely want to avoid this.

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