Selling MFs, stocks? Keep costs in mind

Retail investors seem to be fleeing the stock market.

A recent CRISIL report suggests mutual fund houses have lost a record eight per cent, or 3.5 million folios, since the beginning of 2013.

The story is no different for stocks.

Between September 2012 and the corresponding period this year, retail holdings in BSE 500 stocks have fallen from 8.16 per cent to 7.5 per cent -- down Rs 57,180 crore (Rs 571.8 billion), in terms of retail market capitalisation.

But before you rush to redeem, keep a few thoughts in mind.

Kiran Kumar Kavikondala, director, WealthRays Group (securities and commodities), says, “We advise redemption if after a year the fund is giving 12-15 per cent post-tax returns.

“But we advise it only if it is completely tax-free.”

To calculate the yield, you have to calculate the exit load and taxation; you have to deduct these from the returns, or the value of the fund.

While redeeming your mutual fund investment, taxation is the most important aspect.

In case of debt funds, if you exit before a year, it would be added to your income and you would be taxed according to your bracket.

. . .

If you sell after a year, the gains would be taxed after indexation for inflation.

For equity funds, the short-term tax is 15 per cent if you exit before a year; there’s no tax if you sell after a year.

The next important thing: Load.

Usually, it is 0.5-two per cent of the redeemed amount.

It is deducted from the net asset value during redemption.

For equity funds, it is usually one per cent if you sell within a year; in case of debt funds, it is 0.5-one per cent.

If you have a systematic investment plan in any fund, every instalment has to complete a year, to avoid tax.

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So, to redeem an SIP without paying tax, it might take up to two years, Kavikondala says.

For closed-ended funds such as equity-linked saving schemes or capital-protected funds, you cannot redeem these before the lock-in period.

ELSS funds have a lock-in of three years. Since these are tax-saving instruments, you cannot redeem these before time, as you have claimed the tax-exemption on these.

In case investors opt for the dividend reinvestment option, each instalment re-invested would be subjected to the lock-in period, says Hemant Rustagi, chief executive, Wiseinvest Advisors.

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Similarly, fixed-maturity plans, which typically have a lock-in of three months a year, cannot be redeemed before time.

You can sell these on stock exchanges, but it is difficult to find a buyer.

So, you might be forced to sell at a discount, Rustagi adds.

For stocks, securities transaction tax and short-term capital gains of 15 per cent would be applicable if the stock is sold before a year.

There is no long-term capital gains tax.