Photo: iStock
Photo: iStock

Don’t redeem gains from MFs if you don’t need the money immediately

  • Investing in mutual funds can be a simple and easy exercise if we understand some of the basic ways in which such investments work
  • It would be best if you let it accumulate value for the long term

I had invested in Aditya Birla Sun Life (Growth) in February 2018. While going through my portfolio recently, I found the bet asset value (NAV) per unit has gone up and, hence, I redeemed the gained units. However, I found that the redemption amount got debited from my investment and not from the gained units. And now the portfolio shows invested amount on the lesser side and the gain still exists. Despite redemption, I still stand on the gain side. Could you please tell me why the redemption hasn’t been done for the gained units?

—Govindan M.

Investing in mutual funds can be a simple and easy exercise if we understand some of the basic ways in which such investments work. When we invest in a fund, we are buying a certain amount of units for the amount we invest (number of units we get is equal to the amount we invest divided by the current purchase NAV of the fund). These units, left to themselves, will hopefully gain value over time, depending on the market conditions. These gains are reflected in the growth of the NAV of the units we hold. That is, the units we bought when their NAV was, say, 20, are now worth more because the NAV has grown to, say, 30. So every unit is worth more. However, we do not get new units as a result. Their value has gone up since the price of each unit is now higher than when we bought them. So, when we redeem them, we do so by selling a few of these units at the NAV value at the time of redemption. So, there is no such thing as “gained units". There are only units that have gained in value. So, in your case, you have sold a few units whose total value probably equals the gain you have made over the last year.

Also, this method of accounting for redemption (called the “first-in-first-out" method) is good for investors from a taxation perspective. By redeeming part investment and part profit, the amount of profit for which you pay taxes is less than if you would have (or were able to) withdraw only profits.

Finally, avoid redeeming from your MF investments if you do not need the money for expenses. If you are simply redeeming because the NAV went up and you want to book profits, you would need to consider the question of where to redeploy the redeemed money. It would be best if you let it accumulate value for the long term.

Srikanth Meenakshi is co-founder and chief operating officer, FundsIndia.com. Queries and views at mintmoney@livemint.com


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