3 Tips to Create a Smart Mutual Fund Withdrawal Strategy

When it comes to mutual funds, most beginners are only interested in selecting the best mutual fund scheme that can deliver the highest possible returns. While there is no denying that every investor invests to earn profits, one cannot overlook the importance of exiting a mutual fund investment at the right time.Even if you’ve selected a top fund, the returns won’t materialize if you fail to work on your withdrawal strategy. Here are a few tips that can help you create a withdrawal strategy for your mutual fund investment-

Any investment without a fixed objective is like navigating a ship without a port of call. Every journey needs a destination, and the same is true for investments as well. But rather than waiting to achieve 100% of your objective, it is wise to start redeeming the mutual fund units when you are 90-95% close to your goal.It is generally recommended that you start withdrawing systematically at least 6-12 months before the funds are needed. You can use the SWP (Systematic Withdrawal Plan) for the same. The amount you withdraw can be deposited into a savings bank account or other safe options like bank FDs.

If you don’t want to sell the units, another option is to start moving your funds from riskier schemes to less risky schemes. For instance, if you’ve invested in equity funds for 10 years and are 90% close to the objective, redeem the equity fund units and invest the amount in a debt fund. As you might know, debt funds are significantly safer than equity funds.Most AMCs now also offer STP (Systematic Transfer Plan). With this facility, you can give a standing instruction to the AMC to switch funds from one mutual fund scheme to another scheme offered by the same fund house. You can consider using this facility for systematic transfer to safer funds.

Many of the mutual fund schemes also have exit loads. It is a type of fee, generally 1% of the withdrawal amount, that you are required to pay while redeeming the units. However, the exit load is mostly not applicable to investments held for more than 3-5 years. But you should still confirm the same with your AMC.Similarly, there are also tax implications that you should consider for mutual fund withdrawal. Equity and debt funds are taxed differently. Even the definitions of short-term and long-term capital gains are different. Do consider the tax aspect as well before redeeming.

There are always two critical aspects of investing- entry and exit. Unfortunately, most people are only focused on their entries and how to generate maximum returns. But without a clear exit strategy, even the best investments might not provide you with the expected results.Consider these points when creating a mutual fund withdrawal strategy to ensure that you book your gains at the right time.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.