Sunday, May 29, 2011

When should I redeem my mutual fund?

For most people the decision of the redemption of a mutual fund is as daunting as that of picking the right mutual fund. Again if you try to run a google search on ‘when to redeem your mutual fund’ it returns a lot less relevant results than when you search for ‘how to select a mutual fund’! And I have heard an investment manager once remark on TV that it takes a certain degree of expertise and proficiency to redeem your mutual fund investment at the right time. However, it is not all rocket science and all it takes is just basic common sense decisions. This article is not on learning how to ‘time’ the market and redeem your mutual fund but on when to redeem it since it is no longer prudent to hold your mutual fund. There are several reasons as to why you should redeem your mutual fund but the most common and top reasons for the same are as follows:

1. You have achieved your investment objective: Every investment is made with some specific objective like paying for your child’s education, marriage, purchasing a house or any other objective. If your fund is performing more or less on expected lines and you haven’t met your investment objective then it makes no sense to redeem your fund. However if you have achieved your investment objective or are close to achieving your investment objective, then you should slowly start redeeming your fund, so that you are completely liquid in cash by the time you would need to pay for your goal (like purchasing a house).

2. The Star Mutual Fund Manager has quit: The performance of your mutual fund is inextricably tied to the capability and investment acumen of the fund manager. A lot of investors check the track record of the mutual fund manager and not just the performance of the fund which is indeed a wise decision. However, in the mutual fund industry, you would see a lot of churn amongst fund managers and trying to follow a star fund manager may result in you having to switch among fund managers quite a bit. Unless you are sure that the fund manager can give really significant results with respect to others, it makes sense to invest in process-driven fund house since this is a more reliable way of investing.

3. Your mutual fund is not performing: I have heard several people complaining about the performance of their mutual fund. However most people tend to look at the performance of their fund in the short term. Evaluating a mutual fund in the short term would give you an erroneous view of the performance depending on the state of the markets. To correctly understand the performance of a mutual fund, you should consider its performance over a period of at least 3 -5 years. However, even after all this you are convinced that your mutual fund’s performance is below par, then it’s best you redeem it.

4. You have invested in a thematic fund: In one of my earlier articles, I had mentioned the dangers of investing in a thematic fund. The problem of investing in thematic or sectoral funds is that if the whole sector is hit by some macro economical or regulatory factors, your mutual fund performance would dip significantly. You should not invest in a thematic fund unless you have sufficient knowledge about the particular sector and you have good reasons to believe that the particular sector is poised for considerable growth. Most investors do not have the necessary skills and resources to track the underlying sector/theme. They only got invested in them either because everyone they knew was investing in them or their agent made a compelling marketing pitch for the fund. Either ways they are invested in the fund and want to know when they can redeem. If you are one of them, then the right time to redeem your thematic fund is when the stock markets give you the opportunity. A market rally is an opportunity for you to sell that thematic/sector fund that you always wanted to redeem but could not because of unsuitable market conditions.

For example: Several people had invested in Telecom Sectoral funds 3-5 years back when the telecom sector was booming but currently due to the intense competition and a price war in the sector, the companies and the funds in that sector aren’t doing too well.

5. Your mutual fund has revised its investment process/mandate: Mutual fund managers have certain guidelines’ about how they should manage their funds which is commonly known as the fund mandate. A mandate has been formally stated and hence a lot of investors choose funds based on this mandate. Sometimes mutual funds revise their mandate, if they believe that they can perform better following another investment process. In the event of a revision in the mandate, regulations require that investors be given the option to redeem the mutual fund without an exit load, so you can redeem the investment without worrying about the exit load (if any). So if you had invested in a fund because of a certain mandate and if the revised mandate does not interest you, then you should redeem your fund.


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