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Will I lose on the benefit of compounding if I move from a non-performing to a performing fund?

Dhirendra Kumar explains the consequences of making that switch

I've been investing in a mutual fund scheme for the last seven years but now plan to redeploy the money in another scheme due to underperformance. Will I lose on the benefit of compounding over the previous seven years?
- Prathamesh Rathi

No, you will not lose on the benefit of compounding. All the appreciation has already happened, and now, by moving into a superior fund, you're making a change for the better.

Regarding the appreciation in the last seven years, a little bit of compounding disadvantage will be created. This is because when you redeem your investment, 10 per cent of the gains will go by way of taxes. But even in this case, only the gains post the clamping of capital gains tax, which is February 1, 2018, will be taxable. After that date, all the gains that happened in your equity funds will be computed, and you can get a capital gain statement from the fund after you redeem it. 10 per cent of that will be deducted as tax. From here on, your money will start appreciating, or the benefit of compounding will start.

But if the fund is horrible or if you have given up hope of improved performance, do the objective evaluation. Even the finest of funds have a bad phase, and you should not quickly give up on such funds. That is why I think, for most investors, choosing their funds carefully is critical.

This is one significant reason for investing in funds for the long run and not necessarily changing frequently because the advantage of this compounding is quite significant. But at the same time, don't get stuck only for this reason. If your fund has turned bad and you have given up on it, make changes and move on.

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