“Wow, my money has gone up 20 per cent in just three months! Maybe, I should make these gains safe.” Or, “Oh no, my money invested a month ago is showing negative returns!” These thoughts must have crossed the mind of every investor.
When we see our money grow or incur a loss, we feel an impulse to protect the growth of our investment (fearing possible loss) or protect the money invested (fearing further losses). Does this mean that whenever you see your investments incur a gain or a loss, you should withdraw? It is not wise to impulsively act and withdraw your MF investment every time you see a gain or a loss. Also, the longer your money stays invested in MFs, the better will be the prospects for returns. So when should you withdraw?
For an emergency
You can protect your long- and short-term investments from taking a hit by setting aside an emergency fund that holds a substantial amount of money. But if you do not have such an emergency fund and really need money for something unexpected, you can tap into your MF investments.
For a planned expense
If you are investing for a holiday or buying a car, take out the money as and when you reach the savings goal.
Even for such expenses, it is not recommended to withdraw the invested amount earlier than needed. Today, it takes only a few days for a withdrawal from your investment to get deposited in your bank account. Withdraw only close to the date of payment.
Approaching long- term goals
If you have been saving for your child’s education for the past 15 years, and she will go to college in the next five, it is better to shift your money from a long-term category (equity funds) to a short-term one (debt funds) to protect your accumulated wealth from further market volatility.
If the underperformance is due to short-term fluctuations, withdrawing may not be wise.
However, if the fund has been consistently underperforming over two to three years, withdraw your money and invest in a better fund.
Always consider tax
When you withdraw an MF investment, the gain will be less than what you think because you will have to pay tax on it.
Except when withdrawing for emergencies, you should always consider the impact of exit load and income tax on the capital gains.