When to redeem your equity mutual fund investment?

Written by Nilesh D Naik, Head of Investment Products, Share.Market (PhonePe Wealth)

Experts often emphasize the importance of long-term investing in equity mutual funds, stressing that ‘time in the market’ matters more than ‘timing the market’. We also know that Systematic Investment Plans (SIPs) are one of the most effective ways to build wealth over time.

But have you ever considered when the right time to withdraw your equity mutual fund investments might be? Here are some key reasons that could justify redeeming your investments.

Rebalancing your portfolio to achieve desired asset allocation: Asset allocation, i.e. how much of your portfolio is allocated to equity funds, debt funds, gold funds, etc. is one of the most critical aspects of portfolio construction and management. If your asset allocation deviates significantly in favour of equity funds due to stock market gains or for other reasons, it may be apt to reduce your equity allocation by redeeming some of your equity mutual fund investments. However, it’s important to remember that your asset allocation decisions should be based on a proper pre-determined asset allocation framework rather than based on your emotional biases that often influence investing decisions during a raging bull market or during significant market corrections.

Nearing your life goals: You may have a life goal in mind such as buying a car or a house or  building a retirement corpus when you invest in mutual funds. In such cases, as you progress towards that life goal, it may make sense to start redeeming your mutual fund investment. But ensure that you don’t end up withdrawing your investment for impulse purchases such as buying a phone or spending on a new year party.

Consistent underperformance of funds: Another good reason for redeeming your equity mutual fund investment is the consistent underperformance of a fund versus its benchmark and peer group, for a long period of time. Short term underperformance over a one or two year period, however, may not be a good enough reason for redeeming your investment.

Change in fundamental attributes of the fund: Any significant change in the fundamental attributes of the fund which does not align with your investment objectives, may also be a valid reason to redeem your investment from an equity mutual fund. This would typically be related to significant changes in asset allocation or investment strategy of the fund.

Change of manager or fund management team: While change in a fund manager in itself may not be a reason to redeem your investment, a major change in management including the investment team, that can impact the way the fund is managed, may warrant closer assessment leading to an exit decision.

If you have some investments that are not aligned with your investment objectives or risk tolerance, it may be a good idea to get rid of such investments after considering the cost implications due to exit load, taxation, etc. With access to unlimited information and unsolicited advice on social media, and a flood of “innovative” new fund offers (NFOs), investment decisions of even informed investors may get influenced, leading to investing mistakes. 

Tax harvesting: Finally, you could also consider redeeming your equity mutual fund investments to avail certain tax benefits such as offsetting capital gains by booking capital loss or booking tax-free long term capital gains to the tune of ₹ 1.25 lakh in a financial year.

These are some of the solid reasons for investors to redeem their equity mutual fund investments. So the next time you are tempted to redeem your equity mutual fund investments, do assess your decision carefully based on the above framework.