There has been a tremendous increase in number of new mutual fund investors in India. The Association of Mutual Funds in India (AMFI) revealed that the average assets under management (the market value of assets) stood at nearly Rs 23 lakh crore in July 2018, up more than four times from Rs 5.41 lakh crore in July 2008. However, we are also seeing that in equity mutual funds, 51 per cent of the assets get withdrawn in under one year, and only 29 per cent remain invested for two years or longer. This leads us to the question: what’s the ideal time-frame for a mutual fund investment? Let’s explore some answers.
MARKET RISKS
In some funds, the market risks are higher than others. For example, a liquid mutual fund is considered a very low-risk instrument offering low returns. On the other hand, an equity mutual fund has stock market risks. What’s the ideal time-frame to withdraw either investments? When you invest in a low-risk low-returns instrument such as a liquid mutual fund, it should be only for a short period of time — say, no more than six months. When you invest in a riskier asset class, you should have a longer time-frame — say, three to five years at least for equity. The right time-frame allows you to ride out periodic market volatility and achieve better results.
TAX IMPLICATION
Most mutual fund schemes can broadly be described as debt funds or equity funds. The capital gains you make from either are taxed differently. You can have either Short-Term Capital Gains (STCG) or Long Term Capital Gains (LTCG). Debt fund investments remain short-term for three years and your STCG is taxed as per your income tax slab. Afterwards, they become long-term and your LTCG is taxed at 20.6 per cent with indexation benefits, where your fund purchase price is adjusted for inflation. On the other hand, equity funds become long-term in one year. Your equity STCG is taxed at 15.45 per cent. Your equity LTCG above '1 lakh from 2018-19 will be taxed at 10.3 per cent without indexation. Therefore, equity is the more tax-efficient asset class, and theoretically, the longer you stay invested, the lower your rate of tax.
TAX SAVERS and CLOSED-ENDED FUNDS
If your investment is in a tax-saver mutual fund (also known as ELSS) or a closed-ended fund such as Fixed Maturity Plans, there are restrictions on withdrawal. ELSS funds have a three-year lock-in. Therefore any fund units you purchase become eligible for withdrawal in three years from the date of investment. Closed-ended funds, on the other hand, are purchased during the New Fund Offer (fund launch) and redeemed at maturity (typically 3-5 years). Some closed-ended funds can also be traded in secondary markets. Before you make a mutual fund investment, check if your scheme is open or closed-ended. An open-ended fund provides you much greater control over when you can exit.
EXIT LOAD
Most funds apply an exit load for premature withdrawals. For example, many equity funds apply a 1 per cent charge if you liquidate any units within one year from their purchase date. The exit load is applied at the value at which you are redeeming the units. Therefore, to avoid paying an exit load and essentially earning a marginally higher rate of return, stay invested till your exit load period is over.
RETURNS
Are you liquidating your fund because you are unha-ppy with its performance? Remember that most high-risk funds, especially equity funds will go through cyclical ups and downs due to the prevalent market conditions or due to the quality of assets they contain. A short period of low performance should not hasten your withdrawal. Rather, see how your fund has performed over the long term. If it has been continually under-par in comparison to its peers, and if it has failed to meet its benchmarks, it may be time to liquidate or transfer to another scheme. If not, stay invested and wait for the cycle to turn in your favour.
GOALS
Last but perhaps the most important point: did your mutual fund investment meet its goal? If so, cash out and spend your money for the purpose for which you had been saving. If not, stay invested longer if your fund is continuing to perform well. Lastly, if you haven’t set any goals for your investment, absolutely do so because goal-setting in investment is the key to achieving life goals.
— The writer is CEO of BankBazaar.com
