We’ve all been there—unexpected cash needs pop up, and you start to wonder,
‘Do I really have to sell my mutual funds to get that cash?’
The good news is, you don’t necessarily have to!
Whether it’s the medical bill that you have not anticipated or an expensive home repair, there are many ways in which one can use mutual funds, keeping their goals intact.
Let’s look at a few options that are presented for you to make these choices with confidence.
Understanding liquidity options for mutual funds:
Mutual funds are considered liquid because, when you need to, you can easily convert them into cash. While selling is one of the ways you can get your money, it’s not the only way.
Below are some of the ways in which you can use mutual funds for your purposes while still upholding your strategy.
1.Partial Redemption of Mutual Funds
How Partial Redemption Works
Partial redemption allows you to withdraw a portion of your mutual fund units without liquidating the entire investment. This is very helpful for investors who need to raise funds urgently but still want to retain most of their investments.
- For example, if you have 1,000 units worth Rs. 1,00,000 (1 lakh) of a mutual fund, you can redeem 200 units worth Rs. 20,000 (20 thousand) to cover urgent expenses while leaving the remaining 800 units worth Rs, 80,000 (80 thousand) to continue earning returns.
Advantages:
- You still maintain most of your holdings that continue compounding with time.
- The capital gains tax applies only on the redeemed part and may result in you saving more money.
Considerations:
Frequent redemption will affect your portfolio by reducing the benefit of compounding and also reduce the value.
Thus, the option has to be applied strategically so as not to affect long-term investments.
Now that we’ve explored partial redemptions, let’s consider another option that allows you to leverage your investments without selling:
2.Borrowing Against Your Mutual Funds
You can also borrow against your mutual funds if you do not want to liquidate your holdings. You can do this through a variety of platforms, including Yenmo.
How Loans Against Mutual Funds Work
Loans against mutual funds allow you to use your investments as a source of leverage.
- Types of Funds: One can use equity as well as debt mutual funds as security for availing the loan, and most often for a percentage of the value that the fund is carrying in the current time. It provides immediate access to the funds without the compulsion to sell the investments.
Key Benefits of Loans on Mutual Funds:
- Interest Efficiency: Mutual Fund loans are generally cheaper as compared to personal loans. So it is more economical in this regard.
- Potential for Continued Growth: There is an element of growth over time which you avail of when you have liquidity.
- Tax Efficiency: Loans seem to be tax-friendly at least for short-term purposes as against redemptions.
Disadvantages and Points to Consider
- Interest Obligations: You would then service the interest upon the loan, which comes with constant financial planning.
- Market Risk: In case the market value of your funds goes below a certain level, you may be asked for some additional collateral or modifications made to your loan.
As we weigh the benefits of loans against mutual funds, it’s essential to also consider another strategic approach:
3.Systematic Withdrawal Plan (SWP)
Another strategic option is a Systematic Withdrawal Plan (SWP) where you get to withdraw money periodically leaving your main investment intact.
What is a Systematic Withdrawal Plan (SWP)?
An SWP allows you to schedule a regular withdrawal from your mutual fund which gives you the liquidity without calling for a complete redemption. This is really helpful in the case of generating a steady income from investments as in retirement cases.
Advantages of SWP for Monthly Income
- An SWP offers a regular income which allows one to meet his periodic expenses, while the capital amount is kept intact.
- In addition, SWPs in equity funds also offer tax benefits after a year wherein only long-term capital gains tax is applicable.
Best Cases for SWP
- SWPs are good if you require a regular income like a retired person or just to meet your periodic expenses. You receive income regularly but the underlying investments continue earning without getting affected.
Important Things to Consider Before Liquidating Mutual Funds
If you choose to liquidate your mutual funds completely, the following are very
important points to consider
- Tax Implications when Redeeming Mutual Funds
In India, when you redeem mutual funds, the returns are considered as capital gains tax. Equity funds sold within less than one year attract a 15% short-term capital gains tax. Income above ₹1 lakh from equity funds sold after one year or more is taxed at 10%. Here too, debt funds have different tax arrangements, which is a good reason to consult a tax consultant.
- Planning Timing for Best Yield
The market timing is very much effective on the returns that you may get.
Before selling, review the market and how funds have performed to increase your returns.
Selling at the bottom of a market cycle can affect your total value of your portfolio; thus, it is very smart to plan your redemption carefully.
- Effect on Long-term Financial Goals
Frequent redemptions can have a rather adverse effect on your long-term financial goals by draining the power of compounding and reducing your portfolio’s wealth-generating potential.
Match your redemptions to your overall financial goals for not compromising your future.
Conclusion
So, whether you’re leaning towards partial redemptions, loans, or the flexibility of a Systematic Withdrawal Plan (SWP), remember that there are plenty of strategies to meet your financial needs without selling your investments.
Take a moment to assess your situation and, if possible, consult with a financial advisor who can provide tailored guidance.
If you find yourself in need of cash but want to keep your mutual funds intact, consider Yenmo! We offer streamlined loans against mutual funds, allowing you to tackle any financial challenge with confidence while ensuring your investments continue to grow.
Explore how Yenmo can help you achieve your financial goals without losing control of your portfolio! Get started by downloading our app today- Yenmo
