How are Mutual Fund gains calculated during redemption?


Q: If I invest lumpsum couple of times, say last month once and this month once and then I withdraw small portion of amount from that, how will capital gains be calculated?

Whenever you invest in a Mutual Fund, you are actually purchasing units of that Mutual Fund.

The price of each unit is the NAV of that Mutual Fund on the day of purchase.

So if you invested Rs 10,000 and the NAV was Rs 10 then you will get 1000 units (each purchased at Rs 10).

When you redeem your money from the Mutual Fund, you are actually selling the previously purchased units (similar to how one buys and sells shares).

The selling price is the NAV of the day of sale (ignoring exit load etc).

So if the NAV when you redeemed was Rs 11, then your sale value for selling all your units will be Rs 11 * 1000 units = Rs 11,000.

Gains = Rs 11,000 - Rs 10,000 = Rs 1000

Now what happens, when there are multiple purchases made at different points in time and at different prices?

All accounting of gains and losses in Mutual Funds is done at the unit level according to a First In First Out (FIFO) policy.

So when you redeem, the units that you had bought first are also the first to be sold.

So depending on what price those units were bought and the price at which you are selling them, the realised gains are calculated and can be different for units purchased at different points in time.

So for example you had bought 100 units at Rs 10 in Month 1 and then then 100 more units at Rs 15 in Month 2.

Now if you redeem 50 units and the NAV that day is Rs 12, then your first 50 units will be redeemed which were bought at Rs 10 in Month 1 but are being sold at Rs 12 now. So your realised gains for this redemption will be (50 * 12) - (50 * 10) = 100

The above will be the case even though your Month 2 units are in loss because they were bought at Rs 15 each and current price is Rs 12.

If you redeemed 150 units, then all 100 units bought in Month 1 and 50 units bought in Month 2 will be sold.

The realised gains for this redemption would be:
(150 * 12) - (100 * 10 + 50 * 15) = Rs 1800 - Rs 1750 = Rs 50.

If you redeemed all 200 units, the realised gains would be:
(150 * 12) - (100 * 10 + 100 * 15) = Rs 1800 - Rs 2500 = - Rs 700!

That is you would book a loss of Rs 700 by selling all your units.

Here your Month 1 units are in profit but Month 2 units are in loss. So it all depends on the price of purchase of each individual unit.