Curated By: Business Desk
Last Updated: September 26, 2023, 19:26 IST
Mutual funds have recently become one of the most popular tools of investment. The investors are putting their money in mutual funds due to higher return and a wide range of options. Just like fixed deposits (FD), there are many mutual funds which also offer a steady return. Each scheme is suited for particular needs. Those, who are new to the mutual fund investments, often get confused over redemption of a mutual fund or to switch to a new scheme.
Transferring funds from one mutual fund scheme to another is known as switching mutual funds. Your total investment is just transferred from one mutual fund scheme to another for better returns or to mitigate the risk. On the other hand, mutual fund redemption refers to taking money out of a scheme or simply withdrawing your investment.
You should know that for switching mutual funds, the schemes should belong to the same family. These are the things you should keep in mind while switching mutual funds:
• The first is investment strategy, because if you feel that the returns of a particular fund of the same family are better, then you should switch.
• Secondly, pay attention to the tax, because if you switch it from a taxable account, you may have to pay capital gains tax on it.
• The third aspect is fees and expenses. Before switching your investment, you must check the fees charged on it.
In case you want to redeem your mutual fund, keep the following points in mind:
• First, you will have to sell your holding and get the money transferred to your account. For this, focus on the financial goal. If your financial goals have changed and you no longer want to continue investing in the mutual fund, it would be better to redeem.
• Second, you should pay attention to the performance and risk of your investment. If the risk on your investment is increasing or its returns are decreasing, you should consider redemption.
• If you have invested in the short term and need money in the near future, then it would be better to redeem your mutual fund.
Redeeming or switching a fund entirely depends on your decision and financial need.
When changing mutual funds, there is typically no capital gains tax to be paid. On redeeming you may have to pay taxes for certain mutual funds if the investment tenure is more than 3 years.
Additionally, you will not be able to receive returns on a fund if you redeem it, which makes it preferable to switch.