Should You Withdraw Money from Mutual Funds When They Start Giving Good Returns?

Mutual fund investments have proven to be quite a rollercoaster ride. One of the questions that is often asked would be, "Should I withdraw my money from the mutual fund as soon as I start seeing good returns?" It is tough even for experienced investors to answer the question at times. In this article, we will understand what exactly is the right time to withdraw your money from the investments made in mutual fund schemes.

The certainty effect is part of the prospect theory developed by Kahneman and Tversky, which explains why most investors hastily sell investments once they see profits. This is the psychological effect where one would prefer a certain outcome over a probable one that has the potential to yield more.

• Do not liquidate your mutual fund investment at the first instance of profits. Instead, remember your long-term goals.
• Determine if you have adequate risk tolerance, and research the market conditions before withdrawing.
• Always go through your financial objectives and risk tolerance before investing in mutual funds.
• Look at the prevailing exit loads, tax implications, and market conditions before you make a redemption decision.

The answer is a big "no". You should not liquidate your investments when they start giving you returns. Recall why you invested in the first place. Mutual funds are actually meant for long-term wealth accumulation rather than short-term gains. You, an investor, stand a chance to miss out on high returns on your investment if you tend to sell it too early since your investment goal may not have been met yet.

There are a few things to consider and then withdraw from the mutual funds.
 

Risk appetite and the kind of fund

There are times you should leave the investment portfolio, depending on your risk appetite and the kind of fund you have invested in. For instance, if you have invested in a small-cap or mid-cap fund, these tend to be volatile. If you are near retirement or otherwise constrained by liabilities and cannot afford this volatility, then perhaps it would be right to get out. The type of fund also makes a difference. When you select an ELSS fund for tax saving, the minimum tenure that one should stick to is 3 years for availing tax benefits.
 

Market outlook and future predictions

If you are enjoying high yields from market results but experts now predict a downward trend, you could be tempted to withdraw your money. But that cannot always form the basis of your decision because resorting strictly to market predictions will sometimes put you on the wrong side.

Here are the primary reasons you might want to withdraw your investment:

You have achieved your investment objective

You have reached your target, such as a child's college fund or buying a home. You may wish to cash in your investment.

The objectives, management, or class of the fund have changed

It may be that the fund’s objectives, management, or class no longer align with your investment goals.

Consistent underperformance

If the fund continuously lags behind its benchmark or peers even though you have held on for some time, it could be a sign to move over to a more promising fund.

If it is time to get out, then here are some things to remember:

Exit load

Nearly all mutual funds have an exit load at 1% if invested is redeemed within a year. So, do check the exit load applicable for your scheme before withdrawal.

Tax implications

Understand what tax implications exist when you redeem your investment.

Market volatility

Do not withdraw at a time of market volatility. Instead, withdraw when the market is stable to avoid losing your money.

Mutual fund investments need patience. You should not withdraw your funds immediately after receiving good returns.

The Bajaj Finance Mutual Fund Platform has over 1000 mutual funds, and a mutual fund calculator that allows you to compare mutual funds, so that you can plan your investments more strategically and also align them with your goals.