How to redeem only profits from mutual funds?

Published: November 1, 2021 at 8:38 am

A viewer on our YouTube channel asks, “Sir, Kindly do video…how to redeem only profit from mutual funds without reducing unit’s (if we book profits our capital amount also reducing because units get reduced)”.

Experienced investors and regular readers of freefincal would immediately know that the answer to this is: No, it is not possible to redeem only profits from mutual funds (or shares) unless you are a fan of mental accounting.

Unfortunately, the term “profit-booking” – popular among traders- permeated investor and mutual fund communities. This does not literally mean removing (only) profits.

When you buy a bond or a fixed deposit or any interest-bearing instrument, you can separate the profit or gains – in this case, the interest – from the amount invested (the principal).

Such a separation is only notional in the case of any commodity that you need to buy and sell at market price. If you buy one share or fractional units of a mutual fund, its current value = (no of units ) x purchase price + (no of units) x change in price.


This, of course, is the same as current value =  (no of units) x current price.

You can measure the gain (price change) associated with each unit, but you cannot sell that gain alone.

For example, you buy 25 MF units at a NAV of Rs. 10 per unit.  After a while, the NAV becomes Rs. 20 per unit. So your investment of Rs. 250 has doubled in value. Suppose you redeem Rs. 250. Mentally you have got your principal back, but the number of units has also decreased in half.

A redemption of Rs. 250 at a NAV of Rs. 20 per unit implies, 12.5 units have been sold back to the AMC. So you cannot pull out NAV appreciation alone, keeping the units constants.

Suppose you had invested in a dividend option of the fund, and the AMC declares a dividend of Rs. 10 per unit. You will receive an amount of Rs. 250 a dividend (which is taxable as per slab). The number of units you hold will still be 25, but the NAV of the fund after the dividend declaration will fall to Rs. 10 again (assuming the dividend was declared when the NAV doubled). So the value of your investment will only be Rs. 250.

Going back to the growth option example: 12.5 units were redeemed at a NAV of Rs 20 per unit. Now, these units were purchased at a NAV of Rs 10 per unit.

So using:

Redemption amount = (no  of units redeemed ) x purchase price + (no of units redeemed) x change in price

250 = 12.5 x (10) + 12.5 x (20-10).

The point is, every redemption we make will always have some amount of principal and some amount of capital gain or loss. You cannot have one without the other as we are buying units from the AMC when we invest and selling units to the AMC when we redeem.

This is hardly a problem. If you are going to redeem and use the money, there is nothing to complain about. If you are going to rebalance from equity to fixed income, there is nothing to complain about.  We recommend mutual fund investors avoid using the term profit booking or at least appreciate what it entails.

Do share if you found this useful

Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 700 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 2600 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 600 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps