7 reasons to redeem your mutual fund investments
Mutual fund investments should always be aligned with your financial goals.
Equity mutual funds investors are always advised to stay invested over long term and derive greater benefits from the power of compounding. However, there can be some unique situations, which will warrant the redemption of your existing mutual fund investments. Here is a list of various circumstances when you may consider exiting your mutual fund investments:
Achievement of financial goal: Your mutual fund investments should always be aligned with your financial goals. These include building corpuses for your children’s education, post-retirement life, home loan downpayment, buying car, etc. If your financial goal is 12 months away or less and the mutual fund investments meant for it have already reached or surpassed the target corpus, then you can move out of those equity funds and park the proceeds in short term or ultra-short term debt funds. These debt funds have very low risk of capital erosion and yet generate higher returns than savings accounts and fixed deposits.
Consistent underperformance: A mutual fund can be considered as a good one if it consistently generates higher returns than its peer funds and benchmark indices. If your mutual fund fails to do so for more than 3–4 consecutive quarters, then it is time to redeem that fund for a better performing one.
Changed investment objective: The investment objective of a mutual fund scheme states its investment and asset allocation strategy. This helps in finding out whether the fund suits your financial goals and risk appetite. Changes in a fund’s investment objective are communicated to its investors as it can have significant implications on your financial goals. Redeem your fund if the changes in its investment objective renders it misfit for your own financial goals and risk appetite. For example, if your multi-cap fund has changed itself into a midcap fund resulting in higher risk for your comfort, then you should redeem that fund for another multi-cap fund suiting your risk profile.
To move out of underperforming sector or themes: Sector and thematic funds limit their investments to their stated sectors and investment themes respectively. Hence, any adverse changes in the business cycle of the constituent instruments of such funds will dampen their performances for a long time. Opt out of such funds if you are sure that their underlying sectors or themes will underperform the overall market for a long time.
For portfolio rebalancing: Investors often find their asset mix altered after a certain period due to varying returns generated by different asset classes. Their asset mix can also drastically change due to extraordinary returns from equity funds during bull markets or a steep fall in their value due to market corrections. If your changed asset mix drastically alters your exposure to risk, then rebalance your portfolio by redeeming some mutual fund investments from the inflated asset classes and investing the proceeds in the underweight asset class.
To follow life-cycle investing: Lifecycle investing refers to the asset allocation strategy based on your increasing age. Under this approach, your investment portfolio makes a gradual shift from high-risk high-return asset classes to low-risk low-return ones with your growing age. Thus, investors following this asset allocation strategy would need to redeem a part of your equity funds for higher debt fund exposure as they grow old.
Changed risk profile: Unforeseen financial exigencies and drastic changes in your financial goals or income can alter your risk appetite. This may leave your existing mutual fund portfolio with a mismatched risk profile. For example, an adverse job market may require a higher exposure to assets with high liquidity and capital protection.
In such cases, you can redeem a part of your equity fund investments for increasing exposure to short and ultra-short term debt funds. Similarly, an unforeseen financial emergency may require you to redeem your existing mutual fund investments if the lending rates offered to meet the emergency are too high.
- By Manish Kothari – Director & Head of Mutual Funds, Paisabazaar.com