There is no single best time to redeem your mutual Fund holdings.

Just like there is no single best Mutual Fund – it all depends up on your requirement followed by age and risk appetite.

But yes, redeeming a mutual fund is as important, if not more important, as investing in a mutual fund.

Time it as per one of the following criteria and you make money, time it wrong and you lose money or fall short of your financial goal corpus.

The following are the scenarios under which you can and should redeem your Mutual Fund Holdings –

You have reached your financial goal

Always remember why you started to invest – to achieve a financial goal.

If you have achieved it, why be greedy and wait any further?

Let’s say you assumed that at an expected rate of 12%, you will achieve your financial goal in time. Additionally, the portfolio was constructed to match the expected rate of return of 12%.

You are in luck and your portfolio zooms at 13% return!

The amount you need 2 years later is with you right now – at this moment!

What should you do?

I think there are two options –

1. Keep holding and make some bonus money

Yes, we all love bonuses – but only when you are sure of the amount you are going to make before the bonus!

Mutual funds or equity market in general are not very good at protecting your capital in the short term.

Think of a worst-case scenario…

You reached your financial goal in 2007 that you thought you’d reach in 2009.

If you kept holding on to your money, you would have missed your financial goal by a long mile even if it was in your grasp already in 2007.

So, being greedy is not a desirable option.

2. Withdraw and play it safe

Well, not a bad option at all. But sounds ultra-conservative, doesn’t it?

If you are going to redeem it all, don’t forget inflation.

If you have reached your financial goal just a few months before the target, go ahead and redeem. The inflation will not dent your corpus.

But if you have reached your financial goal a couple of years or earlier, it would be best to switch to a safer asset allocation (from 80:20 in favour of equity to 80:20 in favour of debt) or redeem and re-invest in an asset that is safe and will yield returns around the inflation rate – a liquid fund or a fixed deposit!

The idea is to not let inflation dent your corpus and to ensure this in a relatively safe manner.

You have some marketing timing ideas

Unless you are someone who has a great advisor or are a market veteran yourself, this is risky. However, if well executed this approach can make you super rich!

While equity investments are timed as per valuation metrics – PE ratio, PB ratio, dividend yields etc, debt investments can be timed by taking interest rate calls.

If you have been through our debt blog series, you will be able to recall that when the interest rate goes up, the price of a bond goes down – because the new bonds that will be issued will have a higher interest rate and vice versa.

If you think the interest rates are going to go down, but long-term bonds and sell them when they enjoy the highest premium.

In one of our blogs, we have shown that market timing on equity will work better than a passive investment approach. Read more…

Our investment strategies at Finpeg follow the principle of asset allocation. Know more – Finpeg Investment Strategies

Read more: Time in the market versus Timing the market

You have lost confidence in the funds you are holding

It may happen that you have lost confidence in a fund house or certain funds that you are holding.

When you are thinking of redeeming because of this reason, do not make hasty decisions.

Try to go deeper into the problem. Ask the following questions –

1. Are most or all other funds belonging to the same fund category suffering too?
2. If yes, then even during the time of underperformance is it in the top 25% of the funds?
3. If no, then why is your fund underperforming?

When you answer these questions and find out any of the following, your decision to redeem and switch to a different/better fund is justified –

• The fund is underperforming for quite some time now (more than a year) with respect to the benchmark and the peer group
• The fund manager has changed
• The fund size has suddenly increased in a short period of time
• The fund house is distressed and most other funds of the fund house have also suffered. There are no signs of distress receding.

If you do find an underperforming fund in your portfolio, here’s a list of candidates that you can replace the fund with – Best Mutual Funds to Invest in 2019

So, there you have the top 3 reasons to redeem your mutual fund holdings.

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