There is a famous Chinese proverb, “The best time to plant a tree was 20 years ago. The second best time is now.” This holds for investments too as money invested early in life gets more time to grow and yield substantial returns. The other side of the coin is withdrawing the investments when the time is right. But what is the right time?
Mutual fund schemes, for example, are varied in nature and investments in them depend on the investors’ risk appetite and the need to tap the market movement.
Investment and divestment are two sides of the same coin with the latter assuming the same importance as the former. As much as you know when and how much to invest, you must also be aware of when you to dissolve your investments.
Here are some factors that can help you decide when to redeem your mutual fund investments.
You invest in a mutual fund with a financial goal in mind. Merely investing is not enough. You must also monitor your mutual fund investments regularly to assess their performance based on category performance or index funds returns. In most cases, the past five years’ fund performance and its comparison to the index performance are checked. You can also check for reviews on third-party websites, and the fund’s performance based on various parameters. A fund underperforming over a short period or a relatively new fund not moving as per the benchmark must not be construed as failure or a valid reason to exit the same. Look at longer horizons.
Change In Portfolio
Your risk appetite has a direct bearing on your choice of investments, which is why you must go through the fund’s portfolio and other details such as equity to debt ratio, fund manager performance and the scheme’s objectives. A change in the investment objective of the asset management company or a tilt towards riskier funds may be reason enough for a risk-averse investor to consider switching funds. For example, a sudden shift towards small-cap stocks in a multi-cap fund indicates greater risk, thus, prompting a shift to a comparatively stable large-cap fund or hybrid fund with a greater focus on debt instruments.
Overlapping Of Stocks
Investments in too many mutual funds can result in overlapping of stock holdings. This mostly happens when investors ignore checking the portfolio of various funds before investing. Overlap in stocks mostly happens with large-cap or blue-chip funds that invest in shares of large-cap companies as there are a limited number of large-cap companies. It is futile to keep funds with similar portfolios as they will yield similar market returns. Instead, redeem from one or more scheme and allocate to other types of funds that promise returns along with stability.
Also, avoid mutual funds with too much exposure to a particular stock as this increases the risk considerably. Go through the reports of all the funds and decide which ones you must exit for further investments in other funds, holdings or greater tax efficiency.
Change In Fund Manager
Leadership skills matter and that is why you must check details of the fund managers, their past performance and their previous stints. The investment culture of every fund house depends to a large extent on the quality of the fund manager. If a fund manager’s decisions lead to poor returns over a period of time and the funds underperform, the investor must exit.
Renewed Asset Allocation
If you have invested your money in equity-based mutual funds, market volatility is one of the risks. This means that you must gauge their performance every six months to check for asset allocation. If your fund has been earning above-normal returns, you may consider partial redemption to book profits and reinvest in other options.
Financial Goal Achieved
Buying a house, saving for children’s higher education or retirement goals are some of the major life goals for which many people invest in mutual funds. Once the target corpus has been achieved and necessary financial goals met, it may not be necessary to continue the investment. You could redeem in whole or partly depending on your future financial needs.
If the goal is nearing, then too it is a good idea to exit from mutual funds that are riskier in nature and deploy the corpus in fixed income-earning assets to keep the gains protected from market volatility.
A short-term loss must not be the sole reason to forsake an investment. Atypical gains must not be construed as the ultimate benchmark of mutual fund performance. Investments in mutual funds are made keeping financial goals in mind, so be flexible to exit, if and when needed. Remember to keep capital gains taxation in mind. Decide on the alternate investments where you will park your money once you exit the fund.
The author is a financial writer.