Saturday, May 23, 2015

When to exit from Mutual Fund

We all find various theories on when to redeem your mutual fund units. There is no right  or wrong way. There is always a personal way because its personal finance. If you google on when to redeem mutual funds, there would be below reasons:

  • When you need money (pretty obvious)
  • When you are 3-4 years away from your goal AND market is high
  • When the mandate of the fund changes. Example: you started to invest in this fund for its large cap behaviour. Over a period of time, it got into mid and small cap. However, you already have specific funds which invest in mid and small cap. So what do you do? Get rid of the overlapping fund which changed mandate

Here is my story: why I redeemed my mutual fund units:

Long back i.e. in 2010 I was completely unaware of financial products. I was not even in taxable bracket. Since my friend bought some tax saving mutual fund, I thought even I should buy something to save tax. How stupid of me!!!

I called one of my relative who was a mutual fund distributor. I told him that I want some good tax saving mutual fund to invest. He suggested Reliance Tax Saver and HDFC Long Term advantage. I bought both of them. Yahoooo, my first equity purchase. I was happy that I could save tax. At that time, I was in a very small company with 200 people from India. During the end of financial year, I went to concerned person in my company and told him about my investment. He asked me if I know what is my tax liability. I said no but whatever it may be, I have tax saving investment. And then came the punch, "Viren, your income does not cross the taxable bracket". I was disappointed because my investment logic was wrong AND I was not even in the taxable bracket.

The good thing was the agent did not take any advantage of my lack of knowledge. He gave me a decent fund and that too with a dividend pay out option (I wish it was growth option). Thank God it was not dividend re-invest. Cos that re-invest would be locked in for 3 more years.

All these years, I simply ignored that fund. This was not out of the logic that equity funds are for long term or something. I was not aware of what is equity, what is mutual fund or what should be my holding period. I simply let it lie there because I did not need that money any time soon. So I simply choose to check it occasionally and be content that at least it is more than what I had paid for. I had absolutely no idea what to expect from the equity funds.

From last 2 years or so, I started taking investments seriously. I started reading blogs, books and magazines about investments. Over the period of time, I came to know that the funds that I have are not so bad after all.

Today, I think, I have 1% of the required knowledge in investments. My expectation from equity is in range of 10-12%. I am aware that I cannot buy and sell stocks at right time, consistently. Hence, I have chosen the ordinary path of mutual funds. Slowly, I also mapped my holdings in a free portal to check what are my returns. I chose perfios. No reason to choose this.

In perfios, I got to know that my HDFC long term advantage is giving me 15% XIRR. See below snapshot.

This was above my expectation. Still I was not very happy with it.

There was something not right. It took me good amount of days to answer my self why I was not comfortable to see long term advantage in my folio. The answer was it was a dividend pay out option. I want my portfolio of growth funds. The reason is I do not want to eat children of my investments. This is exactly what I did all along. The dividend paid out was promptly consumed without guilt. Had the same money be in market, it could have earned me a decent 10-12% return. Here, I ate the children of my investment. This was not what I wanted to do. If my horizon is 15 years, why have dividend pay out option and eat their children. Get into growth mode was my next plan. When I checked, I found that one cannot change from dividend pay out to growth. There were only 2 options then, either have dividend reinvest (which I hate anyways) or switch to HDFC long term advantage growth option. I found no good reason to buy growth option. Since this fund anyways overlaps with some other funds that  I have chosen. So I was left with only one option and that was redeem it. Since this fund was not at all attached to any goal and given the fact that I had no urgent requirement of the redeemed money, I just switched the units from HDFC long term to HDFC Balanced fund (Read how to select a Balanced Fund here).

Next plan of action is to redeem Reliance tax saver too. In this week, promise.