Factors to consider before redeeming your mutual funds
Gone are the days when redeeming your mutual funds was a lengthy and hectic process. For this, one had to go to a branch, fill extensive forms and only then one was able to liquidate one’s investment. The process has become much simpler over the years. Funds can now be easily redeemed online with a click of a button.
However, before redeeming your mutual fund schemes, make sure to consider a few things so that your investment is not impacted. Even though there is no hard-and-fast rule that pinpoints the right or the best time to redeem a mutual fund scheme, there are some situations under which investors could consider exiting or redeeming their mutual fund investments.
For instance, if your fund is consistently underperforming, or if there are changes in objectives of the scheme that are no longer in line with your goals, you could consider redeeming your funds. Additionally, if you find out that there are many similar types of funds in your portfolio, selling some of them could give the investor’s portfolio a more diversified look.
Here are some of the instances when you should consider exiting your fund;
Change in asset allocation
Various asset classes such as equity funds, debt funds, balanced funds, etc. are included in mutual fund schemes. The asset allocation of a mutual fund scheme depends on the type of scheme it falls under. For instance, while most equity funds usually invest fully in equities, some schemes also split their allocation between equity and the rest in other sectors such as debt or allocation between domestic and international equity. While a fund manager can change allocations, but only within the limits specified, not beyond them.
Here is how the spread looks like for,
i) equity funds – invest 80 per cent–100 per cent in equity and/or 0–20 per cent in money market securities;
ii) balanced funds – 65 to 80 per cent in equity and/or 15 to 35 per cent in debt securities, and 0 to 20 per cent in money market securities.
Usually, experts say asset allocations change due to differential returns from various asset classes. Market movements also impact asset allocation significantly. Under such circumstances, if the fund no longer suits your goals, or is not in line with your risk appetite, you could plan on redeeming the fund.
Among the various advantages of mutual funds, their ease of buying and selling, professional management, inbuilt diversification mechanisms, are some of the top factors that make them ideal for investors to meet their future goals and financial requirements. Therefore, if you are nearing the financial goal that you were saving for, and you need money, you could redeem your funds.
Industry experts usually suggest, when the goal deadline is 2 to 3 years away, an investor should move his/her moving from equity mutual funds (with long-term objectives) to debt funds, as they are liquid and good for short-term goals.
A Systematic Transfer Plan (STP) might be the best way to go about this. Similar to the process of SIP, it allows investors to periodically transfer/redeem certain units from one scheme and invest in another scheme of the same mutual fund house.
Changed or Postponed goals
We all know that chances of returns go up exponentially with the duration one stay invested in mutual funds. Simply put, the longer you stay invested in it, the more are the chances of higher returns. However, different type of goals needs different duration to stay invested.
For instance, for short term goals such as buying a car or going on a short vacation, one might need to invest in a mutual fund for roughly two or three years. While long-term goals such as buying a house the investment tenure could be 7–8 years or even more.
Therefore, if you start investing with a short-term goal in mind, and a few months down the line, you change your mind and think of directing the investment for a long term goal, you can do so but you are required to also make changes in the asset allocation of the scheme. It is so because, while a short term investment will be more inclined towards safer options like debt funds, long term goals require investments in equity funds. Hence, a change of goals could also be the reason to redeem your mutual funds.
It is always suggested by financial planners and advisers never to time the market, and as mutual funds are market-linked instruments, it is quite normal to see falling returns, especially over the short term.
However, you should only worry about your fund’s performance, after checking how other funds in the category have performed, or are performing. If your fund has been underperforming as compared to the peer group for more than two years or so, it should be a signal for you to exit that fund and move on.