Mutual funds can make an excellent addition to your investment portfolio. However, if the mutual fund is yielding less returns than what you anticipated, you might get tempted to sell off your mutual fund units and invest the funds in other better yielding investment avenues.
If you decide to make an exit from your mutual fund investment, you may do so by redeeming the units you hold. Selling mutual funds is known as mutual fund redemption. However, when you decide to sell mutual funds, you must access all the pros and cons and get a good understanding of when to sell mutual funds and how to sell mutual funds. Besides, mutual fund selling techniques play a crucial role in selling mutual funds.
This article helps you in understanding various aspects of how to sell mutual funds and its related concepts. There are four steps for selling mutual funds, let us learn the steps in detail.
How to Sell Mutual Funds
- Contact the Mutual Fund Company or Financial Advisor
If you have purchased the mutual funds from the mutual fund company directly, you must contact them directly. On the other hand, if the purchase is made with the assistance of a financial advisor, you can contact the advisor or his company.
- Check the Fees or Charges of Selling Mutual Funds
Before selling your mutual fund units, check the fees or charges that are applicable. The charges on selling mutual funds depend on the period of your holding, the company with whom you are dealing and the size of the sale. For example, if the purchase of mutual fund units is made with a deferred sales charge, you will have to pay a sales charge on it. The companies selling the mutual fund units with deferred sales charges often allow the holders to sell up to 10% of units without any charge.
- Decide the Number of Units to Sell
For selling the specific number of units of mutual funds, you have to submit a signed form to the respective authority. The confirmation letter signed by you ensures that no one else can sell more or less number of units than specified. The selling price of the mutual fund units is NAV of your fund.
- Instruct About the Money Received on Selling Units
When you sell your mutual fund units through the company or advisor, you can give them instructions regarding what to do with the money. You can ask for a cheque or instruct them to deposit the money into your bank account. You can even use the money to purchase other mutual fund units or investment.
The above mentioned is the process of selling a mutual fund. Along with how to sell mutual funds, you must know when to sell mutual funds. In this section of the article, you will learn about the right time to sell a mutual fund.
When to Sell Mutual Funds
- Change in Fund Manager
The expertise and experience of the fund manager is the first and foremost thing to consider before investing in any mutual fund. Fund managers help in generating wealth. But when a mutual fund company changes its fund manager for any reason, it’s the time to get cautious. It becomes important to check the expertise and knowledge of the new fund manager. If he does not fulfil your criteria, it is probably the time to sell your mutual fund units.
- Change in Strategy
You invest in any mutual fund after determining your financial goals. When mutual fund’s strategy meets your financial goals, you feel more confident and comfortable about your investments. But when the mutual fund company starts changing its investment strategy and that is against your approach, you may think of exiting such mutual fund.
When the mutual fund is not giving the returns you expect out of it even after holding it for the long term, it is probably the time to exit. The best way to know the performance of your fund is by comparing it with other similar funds. If your fund is underperforming, it is not a good sign.
If you have a set asset model and you rebalance it at the end of each year, you may need to sell your mutual fund units. You may also think of selling the mutual fund units when your investment goals change and there is a need for rebalancing. Like for example, if you were following a growth strategy and now want to change it to a strategy that provides a steady income, in that case, you may have to sell your mutual fund units to fit in the new strategy.
The above mentioned are a few of the situations when you may think of selling a mutual fund. However, selling mutual funds should not be an impulsive decision. It is imperative to think wisely and act smartly. Always remember that initially when you decided to invest in mutual funds, you had a positive outlook and that is why you decided to invest. Hence, make sure that your reason to exit is clear. It is ideal to carefully analyse all the pros and cons of your fund's performance and then decide when to sell mutual funds and how to sell mutual funds. Once you gain confidence in your decision, don’t hold back. If you need any assistance regarding investing in mutual funds or any other asset class, you may seek the expert advice of IndiaNivesh.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Mutual Funds Taxation – Know about Tax on Mutual Funds
We all make investments with an aim to enjoy capital appreciation and build a huge corpus in the long run. Mutual funds are one such investment channel that has the potential to offer capital appreciation in the long term horizon. Therefore, you must have always heard financial advisors suggesting the importance of investing in mutual funds. In fact, mutual fund investment is a great way to begin your investment journey. While we carefully plan our investments, one aspect which is often ignored is mutual fund taxation. Mutual fund taxation rules can get slightly confusing for a layman. However, if you have a mutual fund portfolio, it is imperative that you have a good understanding of how your returns will be taxed. Tax on mutual funds majorly depends on factors such as the type of fund you have invested in, your investment duration, your income tax slab and so on. This article helps you understand the taxation rules for mutual funds and how mutual fund taxation impacts your overall returns. Mutual Fund Taxation When you invest in mutual funds, you make profits in the capital investment in two ways – through capital appreciation and dividend receipts. The mutual fund house or Asset Management Company declares dividends on the equity funds appreciation and dividend receipts. The fund house declares dividends in the event of equity funds as and when the fund makes earnings. Likewise, on debt funds, you receive regular interest at a set rate. With these earnings, the value of your mutual fund investment continues to grow. At the same time, it attracts capital gains that tend to be taxable to investors. Understanding Capital Gain on Mutual Fund Capital gain is nothing but the profit that you make on your mutual fund investment when you redeem or sell your mutual fund units. In simple words, it is the difference between the value at which you purchased the mutual fund units and the value at which you are going to sell or redeem them. For example, let us say, Mr. Rohan invested Rs. 2 lakh in a mutual fund scheme on 1st January 2017 and the value of his investment on 1st January 2020 is Rs. 2.5 lakh. In this case, Mr. Rohan has earned a capital gain of Rs. 50,000. Taxation of Capital Gain on Mutual Fund The capital gains tax on mutual funds depends on the type of mutual fund scheme and the investment duration. The duration over which an investor stays invested in a mutual fund scheme is called the holding period. It plays a crucial role in determining the tax implication on the mutual fund investment. Depending upon the holding period, capital gains tax can be classified into two types – Short term capital gains tax (STCG) and long term capital gains tax (LTCG). Short-Term Holding Period Equity funds and equity-oriented hybrid funds are taxable for the short term if the holding period is less than 12 months. On the other hand, debt-oriented hybrid funds and debt funds are taxable as short term if the holding period is less than 36 months. Long-Term Holding Period Holding equity funds or equity-oriented funds for more than 12 months is termed as long term. But in the case of debt funds, the investment is termed as long term only if the holding period is 36 months or more. If the mutual fund is a hybrid equity oriented fund where the exposure of equity is more than 65%, it will be considered as an equity fund for mutual fund taxation. However, when the exposure of the hybrid fund is less than 65% towards equity or it is 50% debt and 50% equity, in such case, the fund shall be considered as debt fund for taxation purpose. Let us now learn about mutual fund taxation rates. Mutual Fund Taxation Rates Equity Oriented Mutual Fund Schemes The mutual fund taxation rates for equity-oriented schemes with a holding period of up to 12 months are taxable for short term capital gains at the rate of 15%. If the holding period is more than 12 months, the long term taxation rate is 10%. The long term capital gains are exempt up to Rs. 1 lakh per annum for investing in equity-oriented mutual funds. Non-Equity Oriented Schemes The mutual fund taxation rates for non-equity oriented schemes with a holding period of up to 36 months are taxable for short term capital gains at the rate of investor’s tax slab. If the holding period is more than 36 months, the long term taxation rate is 20% after indexation. Apart from the above-mentioned capital gains rates, the investor now has to pay tax on the dividend income as per his personal income tax slab rate. Prior to the budget 2020, the fund house (Asset Management Company) was supposed to to pay Dividend Distribution Tax (DDT) on the dividends on mutual funds on behalf of the investors. Another type of tax known as Securities Transaction Tax (STT) is applicable on the sale of mutual fund units in balanced and equity funds. It is applicable to both close-ended and open-ended schemes. Conclusion Since taxes take away a major portion of your corpus that you need to meet your financial goals, it is important that you include the tax on mutual funds in your calculation while doing financial planning. Investing in mutual funds is an art and you will master it with time. While deciding to invest, you must consider a few factors such as your investment goals, risk appetite, investment horizon and returns expectation before making any decision. Acquiring knowledge about mutual funds can help you go a long way. You can read from the vast information available on the internet or you can seek expert advice. If you need any assistance regarding mutual fund investment or taxation on mutual funds, you can contact IndiaNivesh. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
NFO – All about New Fund Offer (NFO) in Mutual Funds
Fund raising is an important aspect of financial planning for any company. There are many ways through which a company can raise capital from the market. However, in the case of an Asset Management Company, they can raise the capital through New Fund Offer (NFO). In this article, you will learn all the important details about NFO and its related concept. Let us begin by learning NFO meaning. What is NFO? When an Asset Management Company launches a fund, a New Fund Offer is launched to raise capital in order to purchase securities. The securities include equity and bond. During an NFO, mostly new mutual fund schemes are launched. NFO is similar to IPO expect for the fact that it is launched by an Asset Management Company. The NFO remains open for a specific period of time and the investors can apply for it during the stipulated price. On conclusion of the NFO period, the investors get the funds at the prevailing Net Asset Value (NAV) of the fund. Many times investors get confused between an NFO and IPO. In this section of the article, we will clear all your doubts regarding the same. Difference Between NFO and IPO Since IPO and NFO both aim to raise money, the investors often get confused between the two. A company brings IPO to raise capital for improving its operational efficiency. On the other hand, an Asset Management Company brings NFO for purchasing the stocks of the company, commodities, bonds, etc. The price of the IPO is much higher than its face value. But in the case of NFO, the fund's price is Rs.10 per unit in general. Let us now learn about the types of NFO. Types of NFO A New Fund Offer is of two types; Open-Ended Funds As the name suggests, the investor can enter or exit the open-ended fund at any point in time after its launch. These funds are launched when the NFO ends. When there is a New Fund Offer, the open-ended funds announces the purchase of new units on a specific date. You can purchase any number of units of these funds. The NAV of the open-ended mutual funds is reported regularly after the closure of the stock market. Close-Ended Funds A close-ended fund is one that does not allow you to make an entry or exit after the NFO period is over. They have a fixed maturity period that ranges from 3 to 4 years from the launch date. Theoretically, you can buy or sell these funds in the market, but it is not possible to do so because of lower liquidity. Let us now learn about the advantages of investing in NFO. Advantages Of Investing In NFO Close-ended funds provide you with the opportunity to invest in new and innovative products that are not available in the case of other funds. The close-ended funds come up with hedging strategies that protect you from the downside in the market by using the put options. However, being a close-ended fund, you can invest only when the NFO period is open. The close-ended NFO mutual funds often outperform other investment avenues. This is because when an NFO is launched during the peak of the market and you invest in it, the fund manager has the authority to hold the funds and invest when the markets are favourable or more attractive. Since close-ended NFO mutual funds have a lock-in period, the fund managers are not required to sell their stocks out of panic leading to losses to the unitholders. The fund managers in close-ended funds have the time to carry out research for stock selection and accordingly invest in securities. The lock-in period of NFO immunes the investors from market panic. With a lock-in period in place, the investors would not fall for bad investment decisions. Therefore, as an investor, you would make higher returns in these funds as you remain in the market for the long term. Since there are many advantages of investing in the NFO, you must select it carefully. To help you with the NFO selection, we list down certain points that you may follow. Things to Consider Before Investing in NFO You must make a background check of the fund house. You must ensure that the NFO has a positive history of mutual fund investments and has the potential to offer good returns in the long run. Before selecting any fund for investing, you must read about the risk, returns, allocation of the asset, etc. of the NFO. Always make sure that you read the offer document carefully and understand the fund manager’s investment process. The minimum amount for NFO subscription ranges from Rs. 500 to Rs. 5,000. So choose your funds accordingly. Some of the NFOs have a lock-in period. So invest in them after considering that factor. The above mentioned are a few things to consider before investing in New Fund Offer. Investing is all about selecting the right avenues and making good returns in the long run. If you are a beginner in the market or seek any assistance in investing, you can contact IndiaNivesh. We understand your financial needs & goals and accordingly suggest the right investment option for you. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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