Most advisors have been inundated with calls from clients to redeem their mutual fund investments in the past few days. The returns that were sorely being missed over last 5-7 years are now being seen in the portfolios, and the clients want to keep it. So is it really the time to redeem?
Investors who had invested during the last bull run have not really seen much gain in their portfolios over the last 5-6 years. Even investments done through SIPs had not been showing any decent returns. This had most of the people doubting their decision in investing in mutual funds. Especially those, who had newly been introduced to mutual fund investing. Many of them would have exited out of sheer frustration of not seeing their portfolio grow. They would be creating what if scenarios in comparison to bank deposits. People who kept the SIPs running were goaded on by their advisors to have faith and patience, else many more would have stopped their SIPs and moved the money to other avenues. Now that the markets are showing some recovery, people want to get whatever profit they can and rush out of the market.
If you redeem now, have you really given a thought to what are you going to do with the amount? Are going to spend it on consumables like white goods or a new car or a holiday which you are planning because now you have money in hand? What if this money is given opportunity to grow further? It might just help you meet some of your major goals. If you are re-investing the money in fixed income instruments, do you realise that you might get negative real returns due to inflation.
Before you rush to redeem your investments do a check on the following things:
Goal Based Investment
Is there a goal for which this investment had been done? Are you nearing your goal? Or has the goal target amount been reached? If answer to any of these questions is yes, you should redeem your fund. Let us say, you have been saving to fund your child’s education. She is in class 10 now and you will need the funds in about 2 years from now. Your requirement was of Rs. 5 lakhs and your portfolio stands at Rs 5.20 lakhs today. In such circumstances, you are better off redeeming your funds and moving them into debt products, either mutual funds or bank FD’s. Since your time horizon is only two years, you should not get greedy to earn more. The market is very fickle and can go either way from where it stands today. If you have not yet achieved you goal, but your target date is approaching, you should still move your funds out and seek alternate sources to meet the shortfall. A financial plan will usually have an alternate option for such scenarios.
To re-balance your asset allocation
A proper asset allocation ensures that you buy low and sell high. It also keeps your peace of mind as the asset allocation if rightly done, is done as per your risk profile. If your asset allocation is 70% equity and 30% debt, and currently the portfolio shows say 85% equity and 15% debt, then yes, you need to redeem/switch and re-balance your portfolio. In doing so, you need to pay attention to other factors like taxation and exit loads. If everything is in place, by all means go ahead and redeem. But also, do not forget to do re-balancing at regular intervals.
When the fund has been lagging its category and peer group a long time
You have large cap fund which was once the hot favourite and you picked it up because your friends did. Have you seen what the funds peer group has been doing? Your fund is at 7% returns when the peer group average is 12%. If this has been the case for some time, there is something wrong. Even if the case is reverse, your fund is delivering much beyond its peer group returns. It could be taking undue risk with the underlying investments.
When the fund is not sticking to its mandate
When you originally invested, the mandate of the fund might have been investing in a diversified basket of stocks. If the fund consistently has sectoral buys or a bias towards large/mid/small cap stocks, then it might be time to reconsider the investment.
When there are major changes in management of the fund
Changes in fund management due to sale or merger of fund houses might bring about changes in the fund mandates, processes, charges etc which might eventually impact the returns. So when there is a change in fund management you might want to check the history and processes of the new management. If you feel that they might not gel with what you want from the fund, you may redeem your investments.
A rational judgement is better than an emotional one when taking a decision on investments. These factors will help you arrive at a rational decision about redemption of your mutual fund investments.
A very good read.
The trouble is when one looks at fund returns and consider if “the fund has been lagging its category and peer group a long time”,
the definition of ‘long’ varies by a wide amount. Not only among investors but also among advisors.
Making an informed decision about this requires, among other things, a good understanding of how compounding works in a volatile financial instrument.
This is one aspect that cannot be emphasized enough.
Good collection of valid points!
One should redeem when “need” is there. Need may include, sudden money requirement along with others mentioned in this article.