Redeeming mutual funds? Read this before you do so!
When your mutual funds are yielding negative returns or when the markets are down, you may consider redeeming from mutual funds. But hold on! Before you do so, please read this.
Many people would agree that redeeming mutual funds was a time-consuming process. To redeem mutual funds, you must either contact the asset management company's (AMC) branch or your mutual fund distributor. Furthermore, because it was an offline-only operation, it used to take a lot longer, even when done through a broker. However, nowadays you can accomplish it with the press of a button.
Although this has brought more convenience, it is also attributed to reduced levels of patience among investors. This is because when the markets have a significant drop or their portfolio turns red, people begin to panic and abandon their assets. However, such a habit will stymie your long-term goal of wealth building. As a result, in this post, we'll go over a few points you should think about before redeeming your mutual funds. If your motivation for selling isn't one of them, you should reconsider.
Rebalancing and asset allocation
When we invest in mutual funds, we often combine debt, equity, and hybrid funds. This is accomplished by allocating a percentage of your investment to each of these asset groups. However, owing to changes in personal financial circumstances or to respond to the external market environment, you may need to modify your current asset allocation. As a result, certain funds may be forced to depart, while others may be forced to enter.
Asset allocation is complemented by rebalancing. Rebalancing simply means reinstating your preferred asset allocation. As a result, even in such instances, you must redeem your mutual funds and reinvest. Re-balancing should be done at least once a year.
Nearing financial objectives/Emergency
Investing in mutual funds allows you to prepare for and attain your financial goals on time. However, as you approach your objective, it is typically recommended that you begin changing your investments to more conservative alternatives. This typically aids in the protection of your profits. This is also one of the scenarios in which you would be required to redeem your mutual funds. In addition, in the event of an emergency, you may need to liquidate your investments.
Underperformance
Things were going well when you invested in a certain mutual fund, but certain circumstances might cause your fund to underperform. For example, if the fund manager has changed, or the AMC has merged with another AMC or been bought by someone else, or if the basic characteristics of the funds have changed, these are some of the reasons why the fund might be underperforming. Furthermore, there are a few external variables that contribute to underperformance, such as taxation, government regulations, the economic outlook, and so on.
You must now determine if the underperformance is attributable to internal or external reasons. If it is caused internally, it may be permanent, however, if it is caused by external sources, it may be transitory. As a result, in such instances, you would be withdrawing from the fund.