Meera had just hammered the last nail to hang her favourite painting. Now that she was through the strenuous but enjoyable adornment of the new home, she decided to relax and enjoy the cup of coffee over the balcony.
Meera had just hammered the last nail to hang her favourite painting. Now that she was through the strenuous but enjoyable adornment of the new home, she decided to relax and enjoy the cup of coffee over the balcony.
No sooner had she mentally made up a guest list to invite for the housewarming, she glanced upon a message from her husband, "Have found a better place, get ready to move." Meera went white as a sheet she had just spread couple of days ago.
Consider yourself in Meera's position of shifting a house the moment you finished setting it up from scratch and had just started liking the surroundings. We often put our investment portfolios through the same position as hers.
We go through minute details, scrape out every little information in selecting a mutual fund scheme and take the plunge. But as greener pastures emerge elsewhere we start finding faults, which may or may not exist and decide it is time to move on.
Unfavourable equity or debt market conditions, lower net asset values translating to higher number of units for purchase, better performance of a few basis points (1% is 100 basis points), movement of fund managers, higher dividends, force many investors to question the merits of the existing schemes they thought were best at the time of investment.
This incessant buying and selling of mutual fund investments at the drop of a hat is what experts term as churning. Though one may think that the new fund would be carefully thought out and hence result in higher performance, chances are you would be able to build a better portfolio by staying put in thoughtfully selected schemes, rather than playing musical chairs.
As per data provided by Association of Mutual Funds in India, 3-7% of the amount held by individuals – High networth and retail – amounting to Rs 37,093.35 crore in equity mutual funds is invested under a folio for a period of less than three months, as on March 31, 2016. About half (52% to be precise) of retail investors stay invested in equity funds for less than 2 years, the data suggests. Equity as an asset class has the potential to perform over longer horizons of 5-7 years.
Letting your money earn
One cannot understand the benefits of a location and the warmth of the neighbours unless you spend time with them. Similarly, judging the fund based on short-term performance would not be correct. The age old adage of longer-term investing comes to the fore here. Give your money time to grow.
Costs
You also need to bear the costs and the time spent in selecting and investing in a fund all over again if you frequently churn. An exit load of 0.5-1% is applicable on withdrawal of funds early, the timeline for which differs from one fund to another.
Taxes
One also loses out money in terms of higher taxes for withdrawing too early. Remember, equity and equity-related mutual fund investments are tax-free if held for more than a year, but if withdrawn early, then a 15% short-term capital gains tax is applicable.
Performance
In what can be termed as a chain reaction, the fund manager too would be forced to sell stocks untimely when the markets may or may not be favourable or before the prices of a portfolio holding peak out when several investors redeem early, thus resulting in poor performance.
By revamping the portfolio too frequently you are also raising doubts on your or the advisors' efficiency of selecting the best of the schemes.
Few reasons why you should shift your MF investments are:
Long-term under-performance vis-a-vis benchmark
Obsolete funds based on themes which are cyclical
Change in long-term direction: for instance, multiple interest rate cuts, that would result in lower debt fund returns and hence switching to other asset classes
Major taxation change
Achievement of goals such as inching closer to retirement, etc
Always peg your comparisons between similar schemes especially in terms of asset class, market capitalisation, thrust areas such as themes or sectors if any, as we don't want oranges to be matched against kiwis. Nothing can replace the need for thorough research before zeroing down on a mutual fund scheme.
(The example and names mentioned are hypothetical.)
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