Traditional financial securities like fixed deposits, insurance, savings certificates and provident funds are easy to manage because most come with a definite date of maturity. This makes it easy for the investor to know when to expect the money back and how much to expect.
However, in market linked investments like mutual funds not only can you invest at any time, you can also withdraw at any time. This feature begs the question, when should you withdraw? But more importantly, should you withdraw simply because you can?
You need the money
You may be tempted to withdraw your mutual fund investment because you need the money. You may need the money to pay your oversized credit card bill, you may need it for a medical emergency or to book an unplanned holiday, whatever the reason, ideally do not withdraw from your long-term allocation.
There are types of mutual funds like liquid funds and short-term income funds, which invest in short term securities with relatively higher stability of returns, these can be used efficiently for any emergency fund creation or simply for parking saving for short periods of time. When you find that you are in sudden need for funds beyond your routine monthly expenditure, you can redeem from these funds without compromising long term financial objectives and return.
If you redeem from funds meant for long term financial objectives, you not only lose out on creating wealth, but also the return you get on the amount withdrawn can be lower than what you originally expected.
There are types of mutual funds like liquid funds and short-term income funds, which invest in short term securities with relatively higher stability of returns, these can be used efficiently for any emergency fund creation or simply for parking saving for short periods of time.
The mandated time horizon is over
You may have heard that you need to be patient in looking for a growth rate from your equity investment. This means that once you buy in, you should remain invested for at least 5-7 years. It doesn’t however necessarily mean that you have to redeem or withdraw this investment at the end of the 5-7-year period. The longer you remain invested in equity, the more you will benefit from compounding of returns. Think of the 5-7-year period as the bare minimum required, remaining invested for longer say 10,12,15 years is what you ideally want.
The same goes for debt funds. You may have invested in a particular debt fund with a 1-year horizon, but if you didn’t end up needing the money for the earmarked objective, don’t feel compelled to withdraw. Let the investment remain as returns will keep getting compounded and accumulating.
A better approach is to tie in your market linked investments with specific money goals or financial objectives. When you do this, you know exactly how long you have to remain invested and the nature of the goal also helps in deciding the type of market linked investment or mutual fund you pick for specific goals. Instead of relying on the investment itself to tell you when to withdraw, pick your funds such that your objectives dictate the redemption date from individual schemes.