Avoiding Redemption of MF Amid COVID-19 Scare
October 29, 2020
Mutual Funds (MFs) are smart investments that are capable of creating wealth over the long term. They can help you meet your long-term financial goals and objectives. They’re also quite flexible when compared with other investment options, since they can be quickly and easily redeemed at any point in time.
The ongoing COVID-19 pandemic has turned the tables completely, with many investors prematurely redeeming their Mutual Fund investments. Is that a good financial move? Well, it may not be.
Before we move on to analysing the reasons behind why you should avoid redeeming your Mutual Funds amidst the ongoing COVID-19 pandemic, let’s first try to understand why many investors are actually going on a redemption spree.
Why Are Investors Redeeming Their Mutual Fund Investments Amidst The COVID-19 Pandemic?
To answer this question, you first need to understand what the stock market had to go through due to the COVID-19 pandemic. Around the latter half of Mar 2020, the number of coronavirus cases saw a steep rise. To combat the spread of the infection, most countries throughout the world, including India, announced nationwide lockdowns.
The widespread shutting down of factories, manufacturing facilities, and commercial and retail stores effectively brought the bustling economy of our country to a standstill. This directly led to a huge sell-off in the stock market, with many Foreign Portfolio Investors (FPIs) exiting the market by selling off their entire stakes.
Such a sudden and deep sell-off rattled investors and caused a significant drop in the Net Asset Value of Mutual Fund investments. Although investors widely regarded MFs to be smart investments, they had no choice but to place redemption requests with their Mutual Fund houses. The primary reason for such behaviour was the panic and fear of experiencing deeper losses. Investors went into a capital preservation mode and tried to limit their losses by redeeming their Mutual Fund investments.
Why Should You Avoid Redeeming Your Mutual Fund Investment?
In spite of the COVID-19 pandemic having a tight grip on the economy and the performance of the stock market, it may not be a good idea to follow the trend and redeem your Mutual Fund investment. Here’s why.
The Sell-Off is Just a Phase
The equity market has almost always reacted negatively during the past epidemic and pandemic situations. Take the Ebola, Zika virus, Avian influenza, and Swine flu outbreaks for instance. The stock market witnessed a phase of deep correction during all of these past epidemics. That said, it has always managed to bounce back strongly post these outbreaks.
The Sensex, which is the benchmark index of the BSE, gave double-digit and sometimes even triple-digit returns within a span of three years from the above outbreaks. The recent COVID-19 pandemic is likely no different. As the panic that gripped the equity market fades and as the economy of the country opens up, investors are bound to return, thereby lifting the prices of stocks back up. All that you need to do is sit tight and wait for the bullish trend reversal.
Re-Entering at The Right Time May Not be Possible
Many investors redeemed the smart investments that they made in Mutual Funds in the hopes of re-entering at the right time. While the idea is quite good, it may not always be practical or easy to execute. Executing this idea requires you to time the market, which is a hard thing to do.
Since the stock market is quite unpredictable, it is almost impossible for an investor to know when the right time to re-enter the market is. Therefore, the chances of you missing the ideal re-entry point is much higher. It is a much better idea for you to stay invested and not redeem your MF investment during this period.
The SIP Investment Route is an Attractive Option
Alternatively, you could view this deep market correction as an opportunity to invest more. With the markets down due to the COVID-19 pandemic, you could adopt the SIP investment route to accumulate more MF units. This way, you can make use of rupee-cost averaging, to bring down the cost of your investment considerably by purchasing more units at lower prices. By averaging out your holdings, you get to reap the rewards much faster when the markets eventually recover and bounce back up.
If you’re holding a Mutual Fund investment with a long-term view, it would be a good idea to hold on the idea of redeeming your fund. The stock markets are bound to correct at some point or the other during the entire period of your holding. But then, it almost always bounces back up.
It is only a matter of time before the stock markets go back up to the pre-COVID levels. Furthermore, if you are invested in a strong and trustworthy Mutual Fund, the best way to beat this market correction is to opt for an SIP investment mode instead of redemption.
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