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How should you withdraw your money from an equity mutual fund (MF)?

Is there is right way of taking out your money from the stock market? Is there a way to liquidate your equity MF investment which would help you maximize your gains? Yes, there is! Read on.

A lot is written about making investment in the stock markets, talking about the strategies and best practices of putting your money into shares (a prominent strategy is a Systematic investment Plan – or SIP – of MFs).

How you make your investment is very important in determining your returns. But equally important is how you liquidate your investment.

Let’s learn about the best ways to remove your money from the stock market.

 

The Philosophy

You can never time the market. You don’t know when thew bottom would come, so you can’t know the exact time to invest. Similarly, there is no way you can know when the top of the market would be – so you can’t know the exact time to sell!

So, the best way to liquidate your investment is to spread it over time, so that you benefit from cost averaging.

While making investments in the stock market, you implement the strategy of cost averaging through Systematic investment Plans of MFs.

While taking out your money from the stock markets, you can do the same through:

  • Systematic Withdrawal Plan (SWP)
  • Systematic Transfer Plan (STP)

 

Systematic Withdrawal Plan (SWP)

This is a facility offered by mutual fund (MF) houses for withdrawing your money from their MF schemes.

Using SWPs, you can remove your money gradually from an MF scheme – you redeem your units over a period of time instead of redeeming all units at once.

Basically, you tell the MF company that you want to withdraw a fixed sum every month / quarter, and at the specified date, this fixed amount is converted into equivalent number of units as per the prevailing Net Asset Value (NAV) for the MF scheme. These units are then redeemed from your account, and the money is given out to you.

Capital gain tax – either short term or long term – would be applicable on withdrawals made through SWPs just like regular redemptions. (For more on capital gains tax, please read “Long Term and Short Term Capital Gain – Income Tax Calculation“)

Please read “Systematic Withdrawal Plan (SWP) – Avoid timing the market while selling and get regular payouts” for more details on systematic withdrawal plan.

 

Systematic Transfer Plan (STP)

STP is a way of transferring your money from one investment option to another. You are not completely withdrawing your money, but are just moving it between two investments which are usually in different asset classes (for example, equity and debt MFs). It is also popularly known as “switching” between MF schemes.

Thus, when you want to withdraw your money from your equity MF, you can systematically transfer it to a debt fund or a money market fund. This way, you automatically invest your money while still removing it from the share market!

Once all the money is transferred from the equity MF scheme to the debt / money market scheme, you can withdraw it and use it to achieve your financial goal.

(You would also like: “Goal Based Investing”)

Capital gain tax – either short term or long term – would be applicable on withdrawals made through STPs just like regular redemptions. (For more on capital gains tax, please read “Long Term and Short Term Capital Gain – Income Tax Calculation“)

Please read “What is a Systematic Transfer Plan (STP) in MFs and how it can help you” for more details on systematic transfer plan.

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