Investment experts mostly ask investors to redeem mutual fund investments when goals are to be met, consolidating the portfolio or the fund is not performing for over a period.
Let’s take a look at some of the cases when one should avoid redeeming their mutual funds.
Need money for emergency:
A lot of investors redeem their investments when they are in need of short-term liquidity. In most cases, investors do not calculate the costs involved with redemption. In most cases, the money is never reinvested, too. Either investor waits for the market to come down or expects markets to go down further.
Experts recommend making use of loan against mutual funds to raise short-term liquidity. A loan against mutual funds can avoid costs incurred during redemptions, allow investments to compound, and protect investors’ long-term goals.
Loan against mutual funds is provided as an OD facility against a large list of approved funds from different AMCs. The entire application process and all the service-related tasks like amount withdrawal, repayments, security withdrawal or loan closure can be completed online without visiting any branches.
Mutual funds are performing poorly in the short term:
Most retail investors are invested in equity mutual funds for long-term goals. However, many of them sell their schemes when returns are negative for a short duration. AMFI reports that around 43% of retail investors redeem equity mutual funds before two years.
If you compare the 5-year rolling return vs the 2-year rolling return for the last 20 years of NIFTY50, around 12% of the time investors made negative returns when invested for two years. Whereas only 0.13% of the time investors made negative returns when invested for five years.
Thus, experts recommend staying invested for long-term goals and avoiding untimely redemptions.
Mutual funds are positive, but goal not achieved:
Booking profit is the ideal choice when your investment goal is met. However, investors often book profits before the goal is achieved just because the fund has given good returns. Such untimely redemptions do not allow investors to capitalize on the full or higher potential return of the mutual funds.
Found an opportunity:
Often investors come across better opportunities in terms of business or investments. Opportunities can also present against certain expenses, like getting a discount on a holiday package or a discount on the car you wanted to buy.
If you have not planned for such short-term expenses, it is ideal to make use of a loan against mutual funds to raise liquidity and fulfill your short-term needs instead of redeeming.
If you are making double-digit annualized returns, then the cost of borrowing will be less with loans against mutual funds compared to returns earned on such mutual funds.
So, before taking a decision to redeem mutual funds consult an expert or a financial advisor. If you aim to generate liquidity for the short term, ask your advisor about loan against mutual funds.
(Krishna Kanhaiya is Director and Chief Executive Officer (CEO) of Mirae Asset Financial Services (India)).
