Top Three Factors to Consider When Redeeming Your Mutual Funds in India

India has now turned into the fastest five economies from the fragile five barely a decade ago, entering 2026 with a renewed optimism to be 3rd largest economy in the world, surpassing Germany by 2027-28. As of January 2, 2026, the Indian stock market is also the 4th largest globally, stands around $5.3 trillion market capitalization, after the mighty U.S. (~$70.3T), China (~$16.2T, including $5T for HK), and Japan (~$6.3T).

At around $4.1T nominal GDP estimate for 2025, India’s stock market cap is now around 125% of its GDP. Similarly, at around $29.4T, $19.5T and $4.7T nominal GDP estimates for the US, China (including HK ~$0.04T), and Japan (contracted from $5.1T in 2019-pre-COVID), their market caps were around 240%, 85% and 135% respectively.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

Thus, as per the famous & simple Buffett indicator, as the stock market cap to GDP goes much above the fair levels of 100-120% for India (125% vs 100% fair levels-best case scenario), it may correct. Similarly, the US at 240% vs 150% and Japan at 135% vs 125% are susceptible to an imminent correction. China is now fairly valued.

Again, if we consider, traditional relative PE/PEG valuation metric- except China (PE: 18), all three major markets (US, India and Japan) are now hovering around the bubble zone (30, 32 and 30) and susceptible to a big correction in H1CY26 for various reasons and any unexpected triggers.

Market Implications for Mutual Funds

So, the bottom line of the story is that both the U.S. and Indian stock markets are susceptible to an imminent big correction, and in that scenario, Equity MFs should also correct (lower NAVs).

As we enter 2026, India’s MF (Mutual Fund) industry stands at a huge AUM of around INR 81 trillion (lakh crore) and is the vital backbone of Dalal Street –helping to cushion persistent FIIs selling since late 2024 by almost INR 1.6 trillion in 2025; DIIs equivalent buying supported by resilient MF SIPs inflow countered FII’s relentless selling.

The market is now expecting a 12-15% CAGR in Nifty EPS for 2027 from the present average CAGR of ~10%. Actual EPS calculated by dividing the summation of weighted adjusted EPS with respective equity capital is now around 800 (TTM) instead of the widely published 1185.

Thus, at around 26300, the TTM Nifty PE is now around 33, not 23 as per the NSE website. NSE does not calculate NIFTY EPS; they only calculate NIFTY PE on a market cap (weighted) basis; i.e. dividing gross earnings of all constituents by market caps, not actual Equity capital.

Why Disciplined Mutual Fund Redemptions Matter

For any knowledgeable MF investor, disciplined redemptions are key to preserving wealth. Although the long-term compounding effect of MF is always preferable, one can also exit & re-enter timely (above one year STCGT/exit load threshold) for even better CAGR.

This may also help prevent wealth erosion, underperformance and misalignments with life events.

In brief, like war & love, anything is fair in the stock market & MFs too-there is no permanent friend or foe. An MF investor can also consider redeeming his MF units partially or even fully to reenter later or diversify/shift to others due to persistent underperformance, fundamental shifts, personal investment goal attainment, and expectations of imminent big corrections in the stock market and rebalancing of portfolios even in an apparent long-term bull market and favourable macros.

Top Three Instances to Consider Redeeming Mutual Funds in 2026

1) Achieving or Nearing Personal Financial Goal

Any disciplined MF investor may redeem his MF units fully or partially upon immediate investment goal fulfilment, preferably above 1-year to avoid additional costs (STCGT and exit load, etc).

He may also use the redeemed MF units to fund his other investment (like a home) or major family expenses & emergencies - like home, healthcare, emergency, education, retirement or any other major expenses, or alternative attractive investment opportunities.

He should book his profit fully or partially and not incur any loss, unless it’s a do-or-die situation. He can also shift full or partially to debt/liquid funds –derisking 1-2 years Pew-goal.

2) Persistent Underperformance or Fundamental Changes in the Fund (recalibrations/rebalancing)

Like any stock investor, an MF investor can also recalibrate their portfolio if there are consistent underperformances over 2-3 years due to specific sectoral or underlying stock issues or shifts in the fund’s DNA.

Although short-term aberrations are normal, mid-long-term inconsistencies are abnormal, which may be caused by specific fund managers' strategy-resulting in long-term negative alpha. In 2025, small/mid-caps underperformed large-caps due to sectoral/earnings rotation and other issues.

Thus, an MF investor may also shift from small/mid-caps to large-cap, savvy MFs. (structural shift/rotation) or even to pure debt/debt-equity mix or Gold-Equity mix.

Many MF investors also do tax loss harvesting at financial year end; i.e. if he already booked some short or long term profits, they can also book (sell) some holdings in loss deliberately to offset prior gains, avoiding any tax (STCGT/LTCGT) and again buy the same in the new year.

• A change in the fund manager, whose new strategy may not align with the investor’s expectations/experiences.
• A shift in the fund's investment objective or style, which no longer matches the investor’s personal investment goals or risk tolerance.
• The fund becoming too large can make it difficult for the manager to invest effectively, particularly in small-cap stocks.

3) Fundamental Changes and High Potential of an Imminent Market Correction

If the MF investor feels that the market (say Nifty)- at a record high and is in a bubble zone, susceptible to a big correction-waiting just for a trigger-he can always book his full or partial profit and re-enter later at lower levels with regular SIPs or even a lump sum amount.

This active timing strategy will help to preserve his wealth, apart from the magical compounding effect. The MF investor should also understand basic fundamental and technical parameters, or consult an independent certified, skilled & experienced personal financial consultant before actual action.

Conclusions

India’s growth story is intact in 2026 & beyond –expected to be led by consumption, CAPEX, stimulus and structural policy reforms. Thus, the long-term compounding appeal for most of the MFs re also robust.

But even then, MF investors may recalibrate (rebalance) through prudent & efficient timely redemption and re-entry (if possible)-led by conviction, personal financial goal achievement, or proven underperformance and shifting of fund strategy, which may not align with the investor's style.

But he should avoid emotional action as compounding rewards, discipline & patience.

Looking ahead, 2026 promises an earnings-led recovery for Indian blue chips, with domestic factors apparently outweighing external vulnerabilities, but headwinds from geopolitics or US/Trump’s policy tantrum may also cause a big correction.

Despite that, the Indian market remains ‘buy on dips’ amid structural resilience and the scarcity premium among EM peers due to rare political & policy stability.

Bottom line

• Invest with discipline; India's growth story remains intact
• Redeem/re-enter wisely—secure tomorrow's wealth today

Important points to follow:

• Avoid impulsive selling/buying based on short-term market volatilities or events, as mutual funds are built for long-term investing.
• Be aware of tax implications and potential exit loads before making a decision, as these can impact the net returns.