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Which Fund to Redeem?

I have two mutual fund investments. One is performing very well and the other not that good. Now if I need some money, which fund should I redeem -- the one, which is giving handsome returns or the one giving moderate returns?

I have two mutual fund investments. One is performing very well and the other not that good. Now if I need some money, which fund should I redeem -- the one, which is giving handsome returns or the one giving moderate returns?
Ritesh Mangal

Though this may sound simple, it is a tricky situation. It is tough for anyone to give you the right prescription considering the fact that you haven't mentioned whether both funds belong to the same category or are different sorts of product. Generally, it's easy to part with one apple if you have two apples. And if you have one apple and one orange, the choice becomes difficult. But it's a bit complex in case of mutual fund investments. Let's look at the first case first.

Suppose both funds belong to the same category. You may think that the fund whose performance is not so good is the most obvious one to sell. But that may not be the correct decision. Perhaps, your so-called handsome fund has done well on the back of select stocks or mid-cap stocks, which is unlikely to sustain for long. On the other hand, the fund giving moderate returns could be a well-diversified fund, which has the potential to deliver consistent returns over the long term. In that case selling the fund, which has given handsome return, would be a nice idea. This way you will be able to book the gains made by the fund. The trick is to stay focused on the future, and for that purpose dig up the fund's portfolio to find the quality of stocks or bonds that each fund owns. And before making a decision, do check whether the fund's profile meets the expectations you have from it.

Let's look at the second case. If both funds belong to different categories—say an equity fund and a bond fund—then you have to keep the fund that is in line with your investment goal. If you have invested with an objective of obtaining consistent returns over a longer period of time, then the bond fund should be the fund to hold, irrespective of the returns. Obviously, in current market conditions, the bond fund's returns would not be as flashy as the equity fund's returns. Similarly, if your goal of investing is to earn maximum gains and stability is a secondary criterion, then you should stick with the equity fund.

However, that is not the end of the story. Nearly all equity funds and bond funds experience gains and losses from time to time. Thus, to analyse performance, you should always look at a fund's relative returns within the category. That way, even if the fund is giving moderate returns, you can understand whether such performance is unusual for its category. For that purpose, our Fund Analysis on www.valueresearchonline.com or Fund Focus section in this magazine also help put your funds' performance into perspective.

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