A reader says, “Suppose my total investment in a mutual fund is Rs. 12,000, and its current market value is Rs. 17,000. If I redeem Rs. 8000, how do I calculate the current total investment?”
Each time we invest in a mutual fund (or stock), we buy units at market price. Each time we redeem, we sell at market price. So, the redemption will have two components – capital gains (or losses) and capital invested.
Finding the capital gains associated with each investment is cumbersome (if we were to DIY), and my usual recommendation for those who spreadsheet trackers is to not worry too much about changes in total investment after redemptions as it will not impact the annualised return calculation in any way.
Let us illustrate this with an example. Consider three MF purchases for Rs. 1000 each on these dates.
| Date | NAV (Units) |
| 01-01-2010 | 17 (58.8) |
| 02-02-2010 | 16 (62.5) |
| 04-05-2010 | 19 (52.6) |
For simplicity, we are truncating units up to one decimal place. In reality, four decimal places are used for the NAV and, hence, for the units.
As of 04-04-2024, the NAV is Rs. 45 per unit, and the market value of 173.9 units is Rs. 7827.9. Suppose we redeem Rs. 5000 on the same date.
This corresponds to 111.1 units sold back to the AMC. The redemption is on a first-in, first-out (FIFO) basis. So, 58.8 units purchased on 1-1-2010 will be redeemed. The remaining 52.3 units (111.1 minus 58.8) will taken from the 62.5 units purchased on 2-2-2010.
The purchase price of the 58.8 units is Rs. 17/unit. Their sale price is Rs. 45 per unit. So, the capital gain is =58.8*(45-17) = Rs. 1646.4
Similarly, the purchase price of the 52.3 units is Rs. 18 per unit. Their sale price is Rs. 45 per unit. So, the capital gain is s =52.3*(45-16) = Rs. 1516.7
The total capital gain is 1646.4 + 1516.7 = Rs. 3163.1. Thus, our redemption of Rs. 5000 has two components. A capital gain of Rs. 3163.1, and the balance (Rs. 1836.9) is our capital invested.
It is important to recognize that we cannot “book profits” alone from a stock of MF. Some chunk of the invested capital will always be present. Also, see: Do you know what happens when money is redeemed from a mutual fund?
So, after the redemption, can we say the net capital invested is Rs. 3000 minus Rs 1836.9 = Rs. 1163.1? Yes, but in my opinion, it is of little use. As mentioned above, the XIRR or annualized return calculation does not need the net investment.
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