When should I withdraw from my mutual fund?

Mutual funds are one of the most popular investments because of their ability to convert into cash quickly. Apart from specific tax-saving mutual funds online (that have a minimum lock-in period) or close-ended schemes, almost all mutual funds can be withdrawn or redeemed without any waiting period. As a wise investor, it is good to stay invested in your mutual funds for the long term.

When you stay invested for a longer duration, the cost of your investment distributes over a longer time horizon, enabling you to earn higher returns. Moreover, long-duration investments allow you to benefit from the power of compounding. However, some situations might require you to withdraw from your mutual funds online.

Here are four circumstances when you can consider withdrawing from your mutual funds:

  • Achieved your financial goal:You can think of redeeming your mutual funds online if you have achieved the financial goal for which the investment was primarily made. For instance, you invested in a mutual fund scheme through SIP to buy a house after seven years. If, after seven years, your mutual fund value is sufficient for you to buy your house, it could be a natural reason for redemption.
  • Liquidity crunch:Life is unpredictable, and a financial emergency can occur at any time. So, in situations where you are in urgent need of cash or have a monetary emergency, such as a health crisis, you can consider withdrawing your mutual funds online. However, you should take this only as the last resort as this can erode the value of your savings and impact you in the long term.
  • Change in the objective of the fund:Sometimes, mutual funds might give you high earnings initially, but specific alterations in the scheme might impact your returns. In some cases, mutual funds might not be a great addition to your portfolio anymore. For instance, a change in fund manager, investment category, etc., can misalign your fund with your investment goals and force you to withdraw.
  • Underperformance as compared to peers:If you witness that your mutual funds are underperforming compared to their peers or a standard benchmark, then you can consider exiting your mutual funds. However, it is advised to observe your fund’s performance over a period of time (1-2) years before making a decision and not as soon as it starts underperforming.

However, before you exist your mutual funds, be wary of these parameters:

  • Most mutual funds online have an exit charge of 1% if withdrawn within one year of investment.
  • Different types of mutual funds attract different tax implications. In the case of equity-based mutual funds, you will be liable to pay short-term capital gains of up to 15%, along with a surcharge and education cess if the mutual fund scheme is withdrawn within one year.
  • Exiting hastily when the market is volatile might decrease the value of your mutual funds.
  • Avoid withdrawing your mutual funds in full. Instead, consider withdrawing part-by-part, especially when the market is volatile.

As per a CRISIL report, mutual funds have a higher chance of providing excellent returns when invested for a longer time, check out investment apps online like Tata Capital Moneyfy app. Hence, unless necessary, it is not advisable to withdraw your mutual funds in case you are investing, keeping your long-term investments in mind.