We practise due diligence while investing in mutual funds but seldom do we pay attention to factors that warrant redemption of mutual fund investment. Although it’s true that timely and disciplined investments in mutual funds can help achieve financial goals, taking a call on whether or not to sell investment can be challenging for most of the investors.
Let’s look at some of the scenarios wherein you may choose to exit your mutual fund investments:
Achieving desired financial goal: Always align mutual fund investment with your financial goals such as accumulating funds for a home loan down payment, children’s higher education or your post-retirement life. Redeem your investment if the set goal has already been achieved. If your financial goal is still a couple of years away and the mutual fund investments meant for it has already reached or surpassed the target corpus, consider shifting your equity fund investment into less risky instruments such as liquid funds or high yield savings accounts. Doing so would protect your accumulated corpus from short term volatility, and also provide a higher degree of liquidity and capital protection.
Consistent underperformance of fund or sector/theme: A mutual fund is considered to be good only if it consistently beats its peer funds and benchmark indices, in terms of returns generated. Consider redeeming your investment if your existing mutual fund/scheme fails to do so for more than 3-4 consecutive quarters.
At times, thematic and sectoral funds can underperform due to adverse changes in the business cycle of the fund’s constituent instruments. You may opt-out of such funds in case you are sure that it would continue to underperform for a long time.
Portfolio re-balancing: Investors often find alterations in their asset mix owing to varying returns generated by different asset class. For instance, an investor’s portfolio has a debt-equity allocation of 40:60, in favour of equities. But a bull market leads to extraordinary returns from equity funds, resulting in equities appreciating rapidly and now accounting for 80 % of the portfolio. You may choose to rebalance your portfolio if any changes in asset mix alters your risk exposure to a great extent. Instead, invest the proceeds in the underweight asset class (debt, in this case), to maintain debt-equity ratio of 40:60.
Fund’s investment objective is changed: Each mutual fund scheme declares its investment and asset allocation strategy. This helps us in finding out whether the fund’s strategy would suit our financial goal and risk appetite. Since any change in fund’s investment objective can have implications on your financial goal, you may choose to redeem your investment if the existing scheme is no longer in sync with your goals and risk appetite.
For example, if you had invested in a multi-cap fund, which has now changed itself into a mid-cap fund involving a higher risk than your comfort level, you should redeem that fund for another multi-cap fund which suits your risk appetite.
Your risk profile has changed: Reasons such as unforeseen financial exigencies, changes in financial goals or income can alter your risk appetite, which may leave your existing portfolio with a mismatched risk profile. Such abrupt changes in risk profile may necessitate the need to redeem your existing mutual fund investments. For instance, the portfolio of an investor possessing an aggressive risk profile is skewed towards equity fund investments. But an unforeseen financial exigency can lead him to a conservative risk profile, implying that he needs to redeem a proportion of equity investments and invest in less risky instruments such as debt funds.
*This article was published in CNBC TV18 on 4th June, 2019