When investing in mutual funds, three key factors hold the power to anchor your decision making- the investment amount, time horizon available to achieve the goal, and the chosen mutual funds as per your risk appetite, which would enable you to realize the set goals. But, An investor’s task does not end with merely investing in the chosen funds. Knowing when to exit a mutual fund is equally important. Instead of using knee-jerk decisions for redeeming mutual funds, one should be aware of trigger points apart from prevalent market situations, to timely take the decision of redeeming their investments in mutual funds.
Explained here are five commonly occuring scenarios and/or reasons that should prompt you to redeem your existing mutual fund investments, and what to keep in mind before redeeming them:
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Here’s When To Sell / Exit Your Mutual Fund
1. Achievement of set financial goal
Investments in mutual funds should always be aligned with your set financial goals. You should go for redemption of your existing mutual funds only upon attainment of earmarked financial goals which are tied to those investments. In case your financial goal is just one year away from maturity and your mutual fund investments have already reached or exceeded the target corpus, then consider shifting your equity mutual fund investment into lesser risky instruments such as high yield savings account, fixed deposits or short term debt funds. This will assist in reducing the risk of capital erosion to your already accumulated target corpus.
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2. Constant under performance of the chosen fund (s) or the sector/ theme
A mutual fund is considered to perform well only if it is able to constantly beat both its benchmark indices as well as peer funds in terms of the returns generated. If your existing mutual funds are consistently under-performing their benchmark indices and peer funds for a period of over 3-4 consecutive quarters, then you should consider redeeming those mutual funds. At times even a sector or thematic funds may underperform due to changes in the business cycle of the mutual fund’s portfolio constituents. Opt out of such under-performing funds if you are sure that these will continue to under-perform for a long time.
3. Portfolio rebalancing
Investors may notice changes in their asset mix due to differing returns generated by mutual funds investing in varying asset classes. For instance, assume that you have set a debt equity allocation of 20:80 for your overall investment portfolio. However, extraordinary returns from equity mutual funds led by a bullish equity market lead to your equity component far outstripping your original debt equity ratio. To bring your debt equity ratio back to 20:80 in such situations, you can redeem a part of your equity portfolio and invest the same in debt funds. Whereas during steep market corrections, you may have to do the opposite to increase your equity exposure and hence, purchase more equity exposure at relatively attractive valuations.
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4. Change in investment objective of the fund
Every mutual fund scheme declares its investment and asset allocation strategy to help you in knowing whether they would be able match your financial goals, risk appetite and investment philosophy. In case of any change in a fund’s investment objective, it can affect its suitability for you. Thus, redeem your existing mutual fund investment if it ceases to suit your risk appetite, investment philosophy and set financial goals. For example, suppose a large cap fund in your portfolio changes itself to a flexi-cap fund and hence, involves higher risk when compared to what your risk appetite allows. In such scenario, you should go ahead and redeem that mutual fund investment for another large cap fund which matches your risk appetite as well as investment philosophy.
5. Alterations in risk appetite
Factors like changes in income or financial goals or even a pro-longed financial stress is capable of significantly changing your risk appetite. Such changes can leave your existing investment portfolio with a mismatched risk profile and hence, require you to go for portfolio re-balancing to match your new risk appetite. For instance, assuming that your investment portfolio possesses an aggressive risk profile and tends to be skewed towards equity investments, and suddenly you witness income disruption or other financial uncertainties. In such scenarios, the need to ensure higher degree of capital protection for your overall investment portfolio can result in the requirement of a reduction in your equity exposure for relatively less riskier instruments such as fixed deposit or debt mutual funds.
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Things to avoid missing on before exiting your MF investments
While you plan to exit from your mutual fund investment, do not forget to factor in the applicable exit load which might be applicable on your MF investment. Exit load is a small fee which might be charged by some AMCs. as a percentage of your fund’s NAV. The primary aim behind levying an exit load is usually to discourage investors from redeeming their investments prematurely, i.e. before the lock-in period gets over. Moreover, levying the exit load fee may also assist in reducing the number of withdrawals from a mutual fund scheme. As different mutual funds tend to charge different rates of exit load and not all may charge it, it is always prudent to check the applicable exit load, if any, before exiting a fund.
Besides this, also ensure to factor in the applicable capital gains tax on your MF investment.
Equity funds levy 15% rate of tax on short term capital gains, i.e. gains on redeeming your equity funds within a holding period of 1 year. Whereas gains realized on redeeming your equity fund units after 1 year are termed as long term capital gains (LTCG). While LTCG upto Rs 1 lakh a year are tax-exempt, gains above this limit get taxed at 10%.
For debt funds, the short term gains are directly added to the investor’s income, and hence the tax rate applicable according to the investor’s income tax slab is levied on short term capital gains, i.e. gains on redeeming your debt funds within a holding period of 3 years. Whereas gains realized on redeeming your debt fund units after 3 years are termed as long term capital gains (LTCG), and they attract a tax rate of 20% after indexation.
As far as hybrid funds are concerned, they are taxed as per the applicable rules for the category they are oriented to, i.e. hybrid equity oriented funds would attract taxation as per the rules applicable on equity funds, and hybrid debt oriented funds would attract taxation as per the rules applicable on debt funds.
Moreover, if you plan to redeem investment from a particular mutual fund and then put in that investment money in another fund, ensure that the chosen fund is in sync with your financial goals, risk appetite and would assist in yielding the expected returns to meet your target corpus by the end of the investment horizon.
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