If you are looking to redeem your mutual funds, keep in mind these things before exiting your mutual fund investment.
Mutual Fund Redemption: These are testing times for investors, particularly those investing in mutual fund schemes. The euphoria of the markets post-General Elections 2019 result and the cut in corporate tax was short-lived with economic slowdown becoming the major topic of discussion, from boardrooms to class rooms. Also, geo-political upheaval in the Middle East, following attacks on Saudi oil facilities, and the ongoing trade war between the US and China have had a profound impact on mutual fund investments, with fund managers finding it difficult to generate alpha. They are struggling to beat respective benchmarks of the schemes.
This has made investors wary, with most of them considering redemption and subsequent exit. If you, too, are thinking on the same lines, it’s essential to keep in mind these things before proceeding. Simply put, you need to ask these questions before exiting your mutual fund investment.
1. Is there a change in fund mandate?
The recategorizing exercise last year by market regulator SEBI was a watershed moment for the industry. The rejig exercise was aimed to make mutual funds more transparent for investors and renaming them to reflect the level of risk involved.
For instance, before the rejig, large-cap mutual funds invested in small caps to generate higher returns. However, now they need to invest at least 80% of the money in large-cap companies, which are the top 100 firms in terms of full market capitalisation.
Thirty-six categories of mutual fund schemes were identified by SEBI, with fund houses allowed to have only one fund for each category. Following SEBI’s mandate, AMCs either renamed the existing funds or merged two funds or more to comply with the regulator’s directive. Merger meant a change in mandate for many funds, which essentially altered their investment policy.
Before redeeming, find out if your fund’s mandate has undergone a substantial change or not. If the change aligns with your objectives, you should stick to it. Else, you can redeem and exit.
2. Have you built the intended corpus?
Mutual funds, particularly equities, help you to build a corpus for various life goals in a disciplined and sustained manner. Staying invested for the long haul can help you benefit from the power of compounding and build a sizeable corpus for essential life goals such as children’s education, marriage and retirement.
Upon analysing, if you find you have been able to accumulate the desired funds, redemption makes sense. Alternatively, if you have invested in equity mutual funds, a few years before the goal, set up a systematic transfer plan (STP) into debt funds to protect the corpus from the vagaries of the stock market.
3. Has the fund underperformed across the market cycles?
It’s not sensible to redeem, based on short-term performance of a fund. Markets usually go through different cycles, which are responsible for the bullish and bearish phases. Before exiting, it’s essential to judge long-term performance of your fund, which can range anywhere between 8 and 10 years.
Data reveals that the Indian markets have witnessed two bearish phases since November 2010. Markets are said to be in this phase if the fall is more than 20%. The first bear phase was from November 5, 2010 to December 20, 2011, when the Sensex lost over 27%. The second phase was from January 30, 2015 to February 11 2016, when it lost over 21%.
What’s vital is to gauge its long-term performance across cycles and if it has not yielded the desired result even in the bullish phase, or has constantly underperformed, you can opt for redemption.
4. Have your goals and their time changed?
This is another important consideration before redemption. The different categories of mutual funds serve a specific purpose. For example, while equity funds are meant for accumulating wealth for long-term goals such as retirement, liquid funds are a better bet to set up an emergency corpus.
It’s important to choose a specific category of mutual fund based on your life goals and stay invested until it’s achieved. Meanwhile, in case there’s a change in your goal or it’s time horizon, you can redeem your mutual fund investment.
For instance, if you desire to accumulate wealth for your child’s higher education in 15 years instead of 20, and have invested in conservative hybrid funds, you can redeem and invest the proceeds in an aggressive hybrid fund. While the former has 10-25% exposure in equities, the rest being in debt, the latter has 65-80% exposure in equities. Investing in aggressive hybrid funds can help you to accumulate the desired corpus quickly.
Mutual fund redemption is an exercise that should be done with utmost caution and consideration. You can always kick-start investment later but doing so, runs the risk of catching the market high. In case of a dilemma, consult an expert.
(By Rahul Jain, Head-Personal Wealth Advisory, Edelweiss)