5 reasons not to redeem your mutual funds - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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16 DECEMBER 2013

The stock markets are scaling new highs. I believe they will decline from here rather than seek higher ground over the next 3 years. With this is mind, would the obvious reaction from my conclusion be: sell out of the stock market, redeem your investment in equity mutual funds and enjoy your profits?

Before you pull the trigger, read on...

On August 28, the S&P BSE-30 Index was flirting with the 17,500 level. Everyone thought the market would collapse. The Indian Rupee was hitting new lows of INR 68 against the USD and had crossed the rate of INR 100 per British Pound: our cricket team may have beaten the English but their currency was a far better performer!

Did the markets collapse?

Nope - they headed north. Big time - and took everyone by surprise.

The stocks markets are at a new high but, for a variety of reasons outlined in "A False Cheer?" I think the stock markets will head south again. They will eventually head higher, but the Indices need to make that turn to the south before they enjoy a longer term more sustainable and more justifiable rally.

So, given this impending decline, should an investor sell out of the recent stock market rally and redeem their investment in their individual stocks and in their equity mutual funds?

------------------------------ Something good amidst all the bad news... ------------------------------

High inflation, asset quality concerns of banks, slower sales growth of FMCG companies and a cut in FY14 GDP forecast by the RBI...

Looks like it could be quite some time before the bad news stops and everything turns positive again.

But should you stop investing in stocks completely until that happens? Absolutely not!

We have prepared a short video revealing an investment approach for uncertain times just like these. Follow this approach and you'll be way ahead of your fellow investors by the time the markets turn positive.

However, this video will be available for a short time only. So you should see it immediately to avoid missing o

Click here to watch the video right now...
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Well, here is why I suggest investors should NOT redeem and should stay invested and be ready to buy more when the stock market declines:

  1. Do you need the money? If you need the money then you must redeem. Call your broker immediately or head to the web site of your mutual funds and start the process of unwinding your investment in stocks and in equity mutual funds. The level of the stock market is immaterial. It may surge by 100% tomorrow or fall by 50%: it does not matter because your reason for investing has been achieved. If you had invested many years ago with a view to use that money in calendar year 2014 to buy a property or to send your children to a college in the US or UK to study, then take the recent run up in the stock market as a blessing. Sell, take your proceeds, pay your taxes, say your prayers, and use the money for what you wanted to use it for. Remember, all investment is for an end purpose. The minute that end purpose is served, then you need to liquidate your investment and achieve that end purpose. Any minute of further delay is speculation. And you should never compromise and convert your "investment" into a "speculation". If you have a loan to repay, then do sell out and repay the loan. Debt is always avoidable.

  2. If you don't need the money, are you selling because you are "timing" the market? Many people reading 'A False Cheer' may say, "Aha, this is a Sell signal. The market will fall and I will buy back later." Well, if you do not need the money for the next three years, do not sell. Ride the market down - and watch it bounce again over the next 3 years. Keep your SIP going and allow that to average your cost of adding equity to your portfolio over time. Many people have sold out at a previous "peak" (or stopped their SIP), sat on the cash, waited for the markets to fall, and even when the markets have fallen, were scared to invest in shares again - and missed the subsequent rally completely. Picture all the people who sold out of the stock market in April 2008 when the Index was still 12,000 or stopped their SIP at that time. True, they felt happy when the Index collapsed to 8,000 after the bankruptcy of Lehman in September 2008. But did they invest in the 6 month window till March 2009? Did they invest before the general election results were announced in May 2009 and before that 17% one-day surge in the market? Using a more recent example: did they buy into the market or double their SIP in August when the outlook for the stock market looked disastrous? If you are timing this market, you need to get your exit correct as well as your re-entry. It's not easy.

  3. If you sell out, what will you do with the money? Okay, so you don't need the money but you still wish to sell. Once you have sold, what will you do with the money? Invest in the Fixed Deposits of State Bank of India for a 9% per annum rate of interest? Good luck with that: you are doomed to have less money to spend next year and in future years. With inflation running way above 10% per annum, an investment in fixed deposits is guaranteeing that you will have less "real" money to spend in the future. Your cost of maintaining your current lifestyle will be far more than the rate of return on the SBI fixed deposit. You will need to adjust your lifestyle down a few notches given your lousy returns from fixed deposits. Don't get me wrong: you must always have a decent chunk of money in Fixed Deposits. But, if you don't need the money for many years, the rate of return that you can make in stocks - and the rate of return that stock markets in India have generated in the past - is far better than what you can earn from fixed deposits. When you invest in stocks or in equity mutual funds you have some chance of beating inflation; when you invest in fixed deposits you are guaranteeing yourself a 100% probability that you will not beat inflation. But, yes, do ensure that you have a good allocation to stocks, to fixed deposits, to gold, and to property. Sell stocks if you need to re-allocate and juggle your overall investment portfolio.

  4. Tax impact of the sale? If you bought into the stock market less than one year ago, any sale may trigger a short term capital gains tax of about 15%. Let's say you bought stocks when the market was 20,000. At an Index level of 22,000, there is a gain of 2,000 points on which you have to pay a tax of about 15% therefore your net return is 1,700 points (300 will go to the tax man). If you can offset these gains with other losses you may have incurred, then a sale makes sense. But for this you need to fully understand the tax laws from your accountant and ensure you will get the benefits of any offsetting. But don't forget to jump back in the market with your surplus funds once all the tax stuff is over and done with. Personally, I don't do things for tax reasons: I buy because if see "value" and I sell either because there is no "value" or because I need the money for an end objective.

  5. Can you pick a better equity mutual fund or a better stock? For a change, the people of New Delhi are showing the light to the rest of the country. The people of Delhi have given the Congress a slap on the face and the BJP a warning. These entrenched members of the political establishment have failed to work for the benefit of the people they were elected to represent. Guess what? The mutual fund industry in India has failed its investors time and again. Every time there is a sensible regulation aimed at helping investors, the established players of the industry have lobbied to fight the change. And then they have lobbied more to put some hare-brained idea into the heads of regulators which will further their strangle hold over your wallet! The idea of a lower distribution fees was something to help investors. The response of the industry? Lobby to throw out the then Chairman of SEBI. Now there is a proposal for a higher net worth to run a mutual fund business. Guess who wants it? Guess who will pay these higher costs of running a business? I think investors in this country need to wake up and sweep out the rubbish and the #dhoku folks who pretend that they are looking after your interests. The truth is they are willing to lay you down on the sacrificial altar and see you butchered to ensure they get their fees and their disproportionate rewards. The mutual fund stalwarts have ripped you enough over the decades in their worship of AuM. Sweep them out and consider investing with a mutual fund that has worked hard to build you an honest and well-performing alternative! Yes, I am talking about Quantum Mutual Fund: read all the documents, study all the papers, discuss it with your friends, and then make an informed and educated investment decision. In full disclosure: most of my investments are in Quantum Mutual Fund. ☺
What am I doing at this stage?

Well, everyone has different needs and invests for different reasons.

I have given you 5 reasons why you should not redeem.

Maybe you fit the profile of a person who does not need to redeem.

Or maybe you fit the profile of a person who does need to redeem.

As I indicated, believe the markets are due for a decline of some 20% - close to where they were in August 2013. Yet, I don't know when that decline will occur and for how long. And I believe there will be some hope of a market recovery sometime in the next 3 years.

My investments in the equity products of the Quantum Mutual Funds are to help me:

  1. Look after the needs of my family in the future,
  2. Use some of the money to buy a vacation home,
  3. Give donations to charity and help me fund the two initiatives we have started: National Streets for the Performing Arts and HelpYourNGO. (Read up on these!)
There is a possibility that the vacation home may come within my budget. If that were to happen, I will redeem some of my investments in Quantum Long Term Equity Fund to pay for that need. Otherwise, I have no plans for any redemption. If my needs change, then my decisions will change. I will happily ride the market down, with the knowledge that - over the long run - it should head higher. For now, I have a 10 year view on my investments. So this is my situation. Each of us has a different need and a different appetite for "risk" and a different ability to "ride a market downturn". And each of us must do what is best suited for their unique situation. Do not listen to any guru: you need to be your own decision maker. If you need any help send an email to Info@PersonalFn.com and they will be happy to help you arrive at a decision.

Note that I am the founder of PersonalFN.com which helps plan your financial goals and also researches the best mutual funds for your portfolio - just as equitymaster provides you independent research on individual stocks.

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PersonalFN recently released the 7th video on Money Simplified - Your Guide to Money & Mutual Funds.

This session guides you on how you can create an ideal asset allocation based on your investment objective, risk appetite and time horizon.

We strongly recommend you do not miss this for anything!

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Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
Quantum Long Term Equity Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
Quantum Liquid Fund
Why you
should own
it:
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 20% Keep aside money to meet your expenses for 6 months to 2 years

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"


Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.


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2 Responses to "5 reasons not to redeem your mutual funds"

Sharat

Dec 23, 2013

Dear Ajit,
Thank you for your column. So I am convinved not to exit from my Equity MF investment already made. But given that you expect the markets to head lower, should I not divert my existing SIP into something like a liquid or a debt fund? What is your suggestion on fresh investments. May be I wait for a "Five reasons to cheer" column soon

Like (1)

Sachin Salunkhe

Dec 20, 2013

Right advice at Right Time! Free of cost!! and this time you have put in right, simple words - "Do you really need that money"...Thanks Mr Dayal. I hope at least 50% of the readers comply with it.

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