When should you withdraw your Mutual Fund?

Vidhya S July 24, 2019 0 Comments

Investors often take the decision of redeeming their fund in a haste. If the market is uncertain or their fund is underperforming or there is a change in the fund manager, their reflex action is to immediately redeem their fund. This may not be the right thing to do.

Mutual fund investments should always be aligned with financial goals. A correct asset allocation is the key to wealth creation. There are various categories of equity, debt and hybrid mutual funds. Picking the right mutual fund will make the difference to your portfolio. You can also talk to a financial advisor for help with choosing the right fund. Stay invested for the long term to benefit from the power of compounding.

So, when should you withdraw? Here is a checklist:

  • When you reach your financial goals

Goals are what you invest for, isn’t it? So, when you reach your goal, it’s only right you redeem your fund. One strategy to follow is that if you have planned your mutual fund investment for a specific goal and it is one year away, you can switch or do an STP to a liquid fund. By doing this, you can reduce the impact of volatility from an equity fund when you are closer to reaching it.

Read why you need to adopt a goal-based investing strategy here.

  • When there’s an emergency

Your first financial goal should be to build a contingency fund. You should be reasonably prepared to manage your financial emergencies. Ideally, your contingency fund should have at least 6 months of your monthly expenses. You can use liquid funds to park a portion of your contingency fund.

If you don’t have a contingency fund, you may have to redeem from your mutual fund investments.

  • Rebalancing your portfolio

Portfolio rebalancing is important to ensure you remain invested according to your financial goal and risk appetite. It should be done once a year to ensure the portfolio still matches your risk profile and goal requirements. If there is any divergence, you may need to rebalance the portfolio by redeeming some part of your investment and investing in the other asset classes. This rebalancing may also be required in case the fund changes its investment strategy and asset allocation and it isn’t in line with your goals or there is a change in the fund manager or an acquisition by another fund house and your new fund manager does not have the same investment philosophy as the old one.

  • Consistent underperformance

If the fund is underperforming due to short term fluctuations in the market, you should not be redeeming. However, if the underperformance is for a longer period, ask your financial advisor on what course of action to take.

Remember to stick with funds based on your financial goals, asset allocation mix and risk profile.

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