Article

Redeeming a Mutual Fund (For Beginners)
February 06 , 2013

A better question to ask is: why do you need to redeem? In general, a good thumb-rule to follow would be: 'Do not redeem your funds till you have retired or have a major life goal coming up'.

It is easy to see when NOT to redeem:

  1. To spend the money on general lifestyle items, or
  2. To try and time the market, i.e. someone told you the market is going to go down, so you try and pack up your investments, or
  3. Invest in another fund, a supposedly 'better' one

Each of these reasons is a fallacy. The first is obvious - while it is very tempting to consume now and save later, you would rather not break your hard-earned savings to splurge today. Unless it is part of a long term goal, the lifestyle items can wait - the longevity of your investments is more important.

The second is a common tactic of brokers to try and make people churn their portfolio. After all, they make their money whenever you transact (buy or sell). So the more the transactions in a year, the better it is for them. It is also easy to fall prey to 'expert advice' in office or parties, where an insider confidently tells you that the market is going to fall. Truth is, it does not matter whether such advice is accurate or not. Your investments earn you handsome returns simply by holding on for the long term. For instance, an analysis of the Nifty reveals that if continuously stayed invested for 7 years, there is absolutely no period in Indian history when the index made a negative return!

The third is again a common broker or bank tactic to push expensive NFOs. We will see how to identify a bad fund below. But otherwise, your existing fund is probably as good as the next one. No one till date has developed a predictive capacity to identify a consistent winner.

It is slightly trickier to know when to redeem (other than of course when you need the money). In general, NEVER redeem an index fund till you retire. The longer you keep it, the better it returns you. For other funds, we will wait till you are comfortable with basic mutual fund investing first, before going into investment and redemption of actively managed funds.

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