Falling Mutual Fund Returns: Why it’s important to plan your exit in advance

By: |
June 9, 2020 8:33 PM

Redemption of equity mutual fund schemes are increasingly becoming unattractive with broader markets start performing poorly in sync with lagging economic growth.

mutual fund, MF, equity MF, systematic investment plan, SIP, CAGR, close ended fund, debt fund, redemption of MF schemes, planning exit early, long-term investmentIt’s very important to plan the redemption early along with sticking to long-term investment plans.

Nitesh (name changed), a government employee, started investing in Mutual Fund (MF) about 6 years back with a long-term objective of purchasing a house before his retirement after about 20 years. However, after his marriage, his wife insisted that they should have their own accommodation early.

With quite a high deduction of House Rent Allowance (HRA) from his salary for staying in government quarter, Nitesh also changed his preference and booked a flat without waiting for retirement.

However, the change in his investment duration creates a concern for Nitesh, as his plan to make part payment from his MF investments went haywire with broader markets start performing poorly despite the Sensex and the Nifty moving up.

Started investing predominantly through Systematic Investment Plan (SIP) from July 2014, Nitesh also invested in some close ended funds and small amounts in debt fund.

He wanted to make part of the down payment for the flat that he booked by redeeming his investments, but the falling returns have forced him change his plans.

As on June 8, 2020, his total investment was Rs 10,87,797.39, while the fund value was Rs 11,48,509.36 producing 5.58 per cent absolute return of Rs 60,712.36 or a disappointing CAGR of just 1.19 per cent.

If he had redeemed his investments a year back, on June 8, 2019, he would get Rs 13,95,260.24 against the investment value of Rs 11,17,797.39, producing a 24.82 per cent absolute return of Rs 2,77,462.85 in about 5 years with CAGR of 8.77 per cent.

Had he planned his exit two years back, on June 8, 2018, he would get Rs 11,67,877.69 against the investment value of Rs 9,22,797.39, producing a 26.56 per cent absolute return of Rs 2,45,080.31 in about 4 years with a satisfactory CAGR of 12.63 per cent.

Although he can manage the payments for the flat without liquidating his investments, the hardship highlights how it’s important to plan the redemption early along with sticking to long-term investment plans.

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