The Mutual Funds industry is about to hit the Rs. 20 lakh crore mark, indicating what a massive hit they have been in the last few years. But the investor base continues to be small, indicating that a large majority of investors are still hesitant about Mutual Funds, perhaps due to a lack of awareness.
With unanswered questions in their minds, people do not want to risk their hard-earned money. How and when to redeem a Mutual Fund is one such question—and it is an important one, as it determines the fruitfulness of a fund.
Once you invest in a fund, you need to monitor it and plan its redemption and book profit when the Net Asset Value adequately accomplishes the financial objective. However, there are situations when the fund does not perform as per expectation, or there is a change in the fund’s management, wherein you need to take a call on whether to stay in or exit the fund.
Here are some situations when you might want to redeem your Mutual Fund investment.
When fund performs below expectation
If a Mutual Fund scheme under performs in comparison to its benchmark index such as SENSEX, NIFTY etc., you must consider redemption. However, do keep in mind that you need to be more patient with equity based funds as they are market driven, and the long term is where you’ll have the best chances of booking profits. You must evaluate the performance based on the nature of the fund, the tenure of your investment, and your risk appetite.
When your investment objective is accomplished
There is no limit to wanting more from a Mutual Fund. Therefore, the best way to set a return expectation is to identify a financial objective. Once a fund has achieved its specific objective, be it buying a house or funding your child’s education, you can redeem it. Say, you plan to purchase a home worth Rs. 50 lakh in five years, and you start investing in a mutual fund Systematic Investment Plan (SIP). If the fund performs better than expected and your investment reaches your objective in four years, you must redeem the investment to buy your house. You also have the option of switching the fund, which means redeeming from your current instrument and simultaneously entering a low-risk fund to protect your money for the next year.
When a Mutual Fund changes its core team
One of the key factors in choosing a fund is the team managing it. If your fund manager changes, you must reconsider your willingness to stay invested in your fund. Fund managers are integral to a scheme’s performance. Replacing them could impact the scheme’s functioning. Consider redeeming your fund if there is data to suggest that your fund would be negatively impacted by your fund manager’s exit.
When you get a better opportunity elsewhere
In case there’s a change in the fund strategy and it is not in alignment with your financial goal, or if there are other funds with better return prospects, compare it with your current fund. Evaluate the associated costs such as the cost of redemption, tax impact and entry load (if any) on the new fund.
Finally, if you’ve decided to exit your fund, you could rely on a Systematic Withdrawal Plan (SWP) or a Systematic Transfer Plan (STP). These would help you redeem your fund, or transfer into another fund by the same Asset Management Company (AMC), in a calibrated and planned manner as decided by you.
(The writer is CEO, BankBazaar.com)