Consider this before you redeem mutual funds!

When the markets are not doing well or you see your mutual funds fetching negative returns, generally you might think of redeeming it. But wait! Read this before you do so.

Many might agree with us on this, redeeming mutual funds was a quite cumbersome process. Where, either you need to contact the asset management company’s (AMC) branch or connect with your mutual fund distributor to redeem mutual funds. Furthermore, as it was an offline-only process it used to take a lot more time even if done via a broker. However, these days you can do it with a click of a button.

Although this has provided more convenience but is also attributable to lower patience levels among investors. This is because, as markets face a big correction or their portfolio turns red, they start to panic and exit their investments. However, such a practice hampers your objective of wealth creation in the long term. Therefore, in this article, we are listing a few things that you should consider before you think of redeeming your mutual funds.

Asset allocation and Re-balancing

When we invest in mutual funds, usually we invest in a mix of debt, equity and hybrid funds. This is done by allocating a certain portion of your investment to each of these asset classes. However, at times due to changes in personal financial circumstances or to adjust to the external market environment, you need to change your existing asset allocation. Hence, this can trigger exit from some funds and entry into others.

Re-balancing is complementary to asset allocation. Re-balancing is nothing but restoring your desired asset allocation. Therefore, even in such cases, you need to redeem your mutual funds and re-invest. It is advisable to do re-balancing at least annually.

Nearing financial goals/Emergency

Investment in a mutual fund helps you in planning for your financial goals and achieving them in time. However, it is generally advisable that as you are nearing your goal, you should start shifting your investments to more conservative options. This usually helps you in protecting the gains that you have made. This is also one of the situations that would require you to redeem your mutual funds. Also, in case of any emergency, you might need to liquidate your investments.

Underperformance  

At the time of investing in a particular mutual fund, and when things were going pretty well, certain situations would lead your fund to underperform. Say, the fund manager has changed, or the AMC has merged into another AMC or has been acquired by someone else, change in fundamental attributes of the funds, etc. are some of the reasons why the fund is underperforming. Moreover, there are a few external factors as well such as taxation, government policies, economic environment, etc that leads towards underperformance. 

Now here you need to figure out whether the underperformance is due to internal or external factors. If it is due to internal factors then these might be permanent in nature, while if it is due to external factors then it might be temporary. Therefore, in such cases, you would be exiting the fund.