Things to Remember Before Redeeming Your Investments

One of the primary goals of investing is to generate returns. After having generated returns, some investors would like to redeem their investments to enjoy the gains made. Sometimes, investors may also be forced to redeem their investments to pay for unforeseen expenses or when extreme market volatility scares them, among other such unusual situations. For new and seasoned investors alike, it is important to remember certain things before they decide to redeem their investments.

Points to Consider Before Redeeming Your Investments

Here are some of the common points that investors should consider if they are planning to redeem their investments:

• Withdrawing in Panic

One of the most common reasons why investors withdraw their investments before they mature is due to panic. Panic is one of the most common emotions among investors, especially when markets are witnessing a correction. However, it is important to remember that corrections in the market are healthy and can be seen as an opportunity to add more units. For investors who are investing through a systematic investment plan (SIP), a fall in the market can help achieve a better cost-price average.

Let’s understand this with the help of a real-life example:

Here’s how a ₹5,000 per month SIP in the BSE Sensex performed from January to December 2023.

 From the above example, it is clear that despite a downturn in the market and increased volatility in the short term, the investment portfolio was able to recoup its losses. Acquiring more units at a lower price allows an investor to bring down the average cost price and also helps ride out the market volatility with ease.

• Redeeming Impulsively

Another common scenario is when investors redeem their investments on impulse or prematurely. Instead of redeeming the investments on impulse, investors should put certain rules and conditions in place. Redeeming the investments too early could lead to missing out on potential gains. Keeping aside certain funds for emergencies can help the investor stay invested for a longer period. Staying invested for a longer time can help grow the capital significantly.

• Reviewing Investments

Before making the decision to redeem one’s investments, it is important to review them. If the investment has been underperforming, it is helpful to compare it with peers, different asset classes, and funds. Although slight drawdowns are common, one should be wary if the fund has been consistently underperforming.

• Reinvesting Without a Plan

Investors might want to redeem their investments to reinvest their funds. However, reinvesting without a proper plan can be detrimental and might deplete the capital. At times, peers or other assets might be performing better. Redeeming one’s investments due to the fear of missing out (FOMO) might result in entering the market at the wrong time. Moreover, not having a reinvestment plan in place will result in the funds sitting idle in the bank.

• Associated Costs

An investor should always consider the various costs, fees, and charges associated with the investment before redeeming. Some funds may charge an exit load if the investment is redeemed before a specific time. Withdrawing funds within a short period of investing might eat away at your returns due to the associated costs.

• Tax Implications

Gains on investments may be subject to taxation. Depending on the time horizon of the investments, the gains may be subject to short-term capital gains (STCG) tax or long-term capital gains (LTCG) tax. Before redeeming the investments, investors should check the tax implications and their impact on the returns.