Should You Withdraw Your Money from Mutual Funds Once they Start Giving Good Returns?

13 June 2023
5 min read
Should You Withdraw Your Money from Mutual Funds Once they Start Giving Good Returns?
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A few questions keep haunting an investor in the mutual fund industry.

And a big one is – “Should I withdraw my money from mutual funds as soon as the investment starts giving good returns?”

This is one problem that most intelligent investors also face while investing.

Therefore, this article will discuss this question in detail and determine the right time to exit the investment.

Before jumping on to the question, let us first understand the genesis of why this thought of selling funds as soon as we get good returns occurs.

The Certainty Effect (Prospect Theory)

Though the heading might seem very technical, the concept is relatively easy.

Kanhneman and Tversky developed a concept termed Prospect Theory. The certainty effect is a part of that theory which explains an investor’s behaviour.

It can be defined as a psychological effect resulting from reduced probability from certainty to probable.

Let us see an example to get hold of this.

Which of the following options do you prefer?

1. A sure gain of Rs. 3000

2. 80% chance to win Rs. 4,500 and 20% chance to win nothing

Most investors will choose the first option. And there is nothing wrong with that. When conducting a similar experiment, 78 per cent of participants will choose option A, while only 22 per cent will determine option B.

But if we carefully look at the options, option B gives us a greater probability of winning more than option A. (80% of 4,500 + 20% of 0 = Rs. 3,600, compared to winning Rs.3,000 in option A).

This is precisely how investors behave in the financial world.

And it also explains the typical risk-aversion phenomenon in the world of finance. Therefore, we can say that investors are very quick to sell investments when they see a profit.

Should You Sell Your Investment When it Starts Giving Returns?

The answer to this question is a big “No”.

You should not be in haste to sell off your investment, but always remember the goal for which the investment was started. You start investing in funds, not just to make small profits, and then make an exit.

Mutual fund investments should be made for the long term with a specific goal in mind. Once these goals have been achieved, you can think of selling those funds.

The Factors that Matter

1. Risk Appetite and Fund Category

The answer to this question also depends on your risk appetite and the kind of fund you are investing in.

Consider this example. Suppose you have started a SIP in a small or mid-cap fund.

We all know that these types of funds are the most volatile. Therefore, you commit to investing in these funds for five years and then withdraw your investment.

This can be because you are reaching retirement age or have other plans. If your risk appetite does not allow you to continue in this scheme, you should exit.

Another reason can be the type of fund you are invested in. For example, you have invested in an ELSS fund lump sum.

2. What Does the Future Hold?

Suppose after a significant rally in the market, the investment has provided tremendous returns in the next year.

At the same time, pundits and analysts alike are sceptical about the market's future because of various macro factors not favouring the investment.

Now, the certainty effect plays on the minds of investors. And most investors do not take a risk and exit the investment with the healthy returns they have garnered.

When Should You Withdraw Your Money From Mutual Funds?

These are the three primary reasons:

1. You Have Achieved Your Goal

1. If the investment goal has been achieved, you can withdraw from the mutual fund.

For example, you have invested in a scheme to buy a house in 7 years. If you can achieve that goal by liquidating the mutual fund units, then there is a valid reason to proceed with the redemption.

Also, your priorities and needs may change at any time. If there is a liquidity crunch that you might be facing, then selling your units will be the most feasible option.

2. The Objective of the Fund Has Changed

If a fund has given adequate returns and there has been an alteration in the scheme because the fund is not a great value addition to our portfolio, then you might consider exiting.

Reasons concerning change in fund manager, change in category, or top holding can be reasons about change in regulations. We need to be privy to these changes and make our exit call based on the same.

It is also advisable to not switch or redeem these investments at one go but wait to see the performance of the fund for a few months or a year before taking a final decision;

3. Underperforming as Compared to Peers

Though the fund you are invested in provides reasonable profit if you notice that the returns are still less compared to its benchmark or competing funds. You can then consider exiting from the fund and simultaneously choose a fund with better fundamentals.

Things to Consider Before Exiting a Mutual Fund

If we have encountered any of the three reasons specified above, then it would be our best option to initiate redemption from the scheme.

Let us see some of them here:-

1. Exit Load

Most mutual funds have an exit load of around 1 per cent if redeemed within one year of investment. It would be best if you considered this before selling your investment. Also, the exit load varies from one scheme to another.

2. Tax Implication

There are different tax implications for different categories of mutual funds. For example, if equity mutual funds are redeemed within one year of investment, they will attract short-term capital gains to 15 per cent, along with a surcharge and education cess.

For debt mutual funds, the period when a short-term capital gain is charged is three years.

3. Volatility Prevalent in the Market

It is always advisable not to sell during market volatility and when there is too much noise.

Exiting a fund when markets go southwards would only mean low returns or capital erosion. Mutual fund investments should always be considered for long periods.

If we need the money on a particular date, we must start withdrawing at least five to six months before that.

They mean withdrawing part by part and not at full go. There are times when exiting might take a toll because the markets are too risky and tumultuous.

Conclusion

I have addressed one of the most frequently asked investment doubts in this article.

And it’s up to you to remember the investment goal whenever such thoughts arise. Also, to reiterate the most crucial thing, stick to your investment for the long term to reap the maximum benefit.

Happy Investing!

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.

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