Should I redeem or switch from my existing mutual funds if they are not the ones that you recommend for 2023?
What should you do as an investor if you have not invested in the best mutual funds for 2023? Should you switch or redeem?
Let’s understand each scenario, but if you want a short answer then it is NO; you shouldn’t be doing a blind switch or redeeming. Let me explain.
If You Have an On-Going SIP
If you have an existing SIP in a fund that is not one of the better funds to invest in in 2023, and more importantly, you believe that the other fund will do better.
Then stop the SIP in your existing fund and start SIP in another fund.
This will help you analyse both funds parallelly. Also, with time, you will know if you were correct in your predictions.
If you find the fund you expected to perform well is doing well and the fund you had in your portfolio before isn’t performing well, then it’s high time you should consider switching.
Switch but without Paying Taxes
When switching, your gains may be taxable, so your benefits of moving from a non-performing fund may be paid in taxes. So one should be careful in switching between funds.
Here is an excellent way to change as well as save on taxes.
Any gains on units held for more than a year in an equity-related mutual fund are long-term. So you pay a 10% tax on the gains if they are more than one lakh in a fiscal.
All you have to do is ensure your total long-term gains in equity investments (Mutual funds + stocks) are under 1L.
Remember, if you are doing a SIP, those units held for a year are long-term, and others are for the short term.
- If you had a SIP for three years, hence for the units bought two years ago are held for over one year. So the gains on those units are LTCG tax at 10 per cent after the first 1L of tax heaven.
- If you follow the FIFO (First In, First Out) accounting method, the first invested units will be withdrawn, and those will be under the LTCG.
You now need to calculate how much your gains are on the units and redeem partially if the profits are above one lakh rupees.
If the one-year time frame has not passed, then they would be on STCG, which is 15 per cent. However, you should also redeem if those units have no profit.
However, you should only redeem those units under LTCG and not STCG or those where you don’t have too much profit under STCG.
Wait for Change in Fiscal
If your invested units give you gains of more than one lakhs, like maybe two or three lakh rupees, then you only redeem half of it in Jan, Feb, and March of 2023.
Then wait for the fiscal to change and redeem the other half in the next fiscal year. This way, you utilise your tax heaven on LTCG, move out of low-performing funds, and invest in high-performing funds.
Switch the non-performing SIPs, start in better-performing funds, and look for opportunities for saving tax.
Withdraw the excess amount that is not performing as well as it should and invest it in the fund that is performing well. This will help reduce taxes and move bad investments into good ones.
What if the Best Fund Doesn’t Perform
We stopped the SIP in fund A and started in Fund B to compare them.
So if we found that the best-performing fund isn’t performing anymore compared to the non-performing fund.
We tend to think that one of the funds has given a 36 per cent return and my fund has a 12 per cent return only; hence I should move to the funds with more returns. However, it is possible in the future that the 36 per cent return does not perform at 12 per cent, but the non-performing fund is now performing.
So when you can compare, you will know that your fund has performed well and Shabbir’s best fund hasn’t, so you don’t lose much but only the return on the last few month’s SIP.
Never invest because someone has recommended it to you. The funds that I am suggesting are not because I recommend those funds. It is the process that I am trying to help you with.
I share the complete process to find the best-performing funds. Feel free to apply your choice of criteria that gives you comfort while investing.
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