RBI Issues Circular On Levying Unfair Interest Charges On Customers

Many mutual fund investors base their redemption decision primarily on the basis of the prevalent market conditions, especially during bearish markets or during assumed peak of bull markets. However, using knee jerk decisions for redeeming mutual funds can have adverse consequences.

Let’s take a look at 5 scenarios when one can choose to redeem his mutual fund investments:

Attainment of financial goals

Mutual fund investments should always be aligned with your financial goals. Redeem your existing mutual funds only when the financial goals tied to them have been attained. Hence, if the maturity of your financial goal is just a year away and your mutual fund investments has already reached or exceeded target corpus, consider moving your equity mutual fund investment into less risky instruments like high yield savings account, fixed deposits or short term debt funds. Doing so would reduce the risk of capital erosion of your already accumulated corpus.

Constant under performance of the fund or the sector/theme

Mutual fund is considered to perform well only when it constantly beats its benchmark indices and peer funds in terms of the returns generated. In case your existing mutual funds consistently underperform benchmark indices and peer funds for over 3-4 consecutive quarters, then consider redeeming those mutual funds. There are times when sector or thematic funds may underperform due to changes in the business cycle of the mutual fund’s portfolio constituents. Opt out of such funds if you are sure that it will continue underperforming for a long time.

Portfolio rebalancing

Investors may find their asset mix changed due to differing returns generated by mutual funds investing in different asset classes. For example, assume that you have set a debt equity allocation of 30:70 for your overall investment portfolio. However, extraordinary returns from equity mutual funds led by a bullish equity market can lead to your equity component far outstripping your original debt equity ratio. During such situations, you can redeem a part of your equity portfolio and invest it in debt funds to bring your debt equity ratio back to 30:70. You may have to do the opposite during steep market corrections to increase your equity exposure and thereby, buy more equity exposure at relatively attractive valuations.

Investment objective of the fund is changed

All mutual fund schemes declare their investment and asset allocation strategy to help you in knowing whether they would match your risk appetite, financial goals and investment philosophy. Any change in the fund’s investment objective can impact its suitability for you. Hence, redeem an existing mutual fund if it ceases to suit your risk appetite, investment philosophy and financial goals. For example, suppose a large cap fund in your portfolio changes itself to a flexicap fund and thereby, involves higher risk for your comfort level. In this scenario, you should redeem your mutual fund for another large cap fund matching your risk appetite and investment philosophy.

Altered risk appetite

Change in income or financial goals or even a prolonged financial stress can significantly change your risk appetite. This can leave your existing investment portfolio with a mismatched risk profile and thereby, require portfolio rebalancing to match your new risk profile. For example, suppose your investment portfolio possesses an aggressive risk profile and is skewed towards equity investments and all of a sudden you witness income or other financial uncertainties. In such situations, the need for ensuring higher capital protection for your overall investment portfolio can require a reduction in your equity exposure for less riskier instruments like fixed deposit or debt mutual funds.

(The author is Senior Director, Paisabazaar.com. Views expressed are personal)