Hello Sir,
I want to redeem a mutual fund to reduce number of fund in my portfolio. This fund is of 5% allocation of my total portfolio and has not beaten the benchmark. I want to how to reinvest this redeemed amount to another MF, should I do SIP or lumpsum. Will lumpsum investment at current market effect the return or I should invest lumpsum without timing the market. My investment horizon is for 15 years. Also will this effect the compounding
Ans: You are thinking in the right direction. Streamlining your mutual fund portfolio is a smart move. Managing fewer, better-performing funds will help you get more focused growth.
You are planning to redeem a fund that has underperformed. That shows your awareness as an investor. Let us now look at the right way to reinvest the amount. Your investment horizon is long—15 years—which is an advantage.
Let us evaluate every angle in detail.
Why It’s Okay to Exit an Underperforming Fund
You mentioned this fund has only 5% weight in your portfolio. It has not beaten its benchmark. That’s a clear red flag.
Reasons to exit:
Fund not beating benchmark for 3 years or more
Fund manager or strategy changed
Poor consistency in performance
Other funds doing better in same category
Selling such funds is wise. It makes your portfolio clean and growth-focused.
One bad performer can pull down overall return. Removing it improves portfolio efficiency.
You made a good decision.
Where to Reinvest the Redeemed Amount
After selling, your goal is to reinvest in another mutual fund. Let us plan it properly.
You asked whether to do SIP or lumpsum. Both are useful, but must be used wisely.
First, identify where this money should go.
What type of fund should you choose:
If your existing fund mix is strong, add to an existing winner
Or choose a new fund with consistent 5-year and 10-year track record
Choose only actively managed funds, not index funds
Why avoid index funds:
Index funds copy the market without intelligence
They fall when the market falls. No protection
No chance to beat benchmark
Passive nature reduces wealth-building capacity
Fund manager has no freedom to select better stocks
Actively managed funds give you:
Expert decision-making
Freedom to shift between sectors
Better downside protection
Superior long-term results in Indian market
So always prefer actively managed mutual funds via regular plans.
SIP vs Lumpsum: Which One is Better?
Let us now come to your main question.
You want to know how to reinvest the amount. SIP or lumpsum?
Your investment horizon is 15 years. This is very long. So you can take equity exposure fully.
Still, timing matters when investing lumpsum.
Let us assess both methods side by side:
When Lumpsum Makes Sense
Lumpsum means investing full amount at once. It works in these conditions:
Market is already corrected or trading low
You are not emotionally affected by short-term falls
You will stay invested for full 15 years
You have chosen a good fund with strong past record
You don’t need this money for short-term goals
Benefits of lumpsum in long-term:
Full compounding starts from day one
Money is fully exposed to market
No waiting time, no idle money
Higher returns if market performs well after entry
But don’t forget, lumpsum needs mental stability.
What if market falls after lumpsum?
You may feel anxious
You may exit early due to fear
Short-term losses can affect your patience
That’s why timing does affect short-term performance. But not long-term growth if you stay invested for 15 years.
When SIP is Better
SIP is the habit of investing every month.
Even for lumpsum amounts, you can do STP (Systematic Transfer Plan).
STP means:
Keep the lump amount in liquid fund
Transfer fixed amount every month into the equity fund
Example: Rs. 50,000 per month for 6–10 months
Why STP is useful:
Reduces risk of market timing
Avoids investing entire amount at peak
Keeps you emotionally stable
Avoids regret in case of short-term correction
Creates smoother entry into equity
Use STP when:
Market is at all-time highs
Volatility is increasing
You are not sure about market direction
You want peace of mind during investment
So, STP is a balanced way to invest lump amounts.
Will Lumpsum Affect Compounding?
This is an important question.
Let us understand compounding clearly.
Compounding depends on:
Time invested
Return generated
Amount invested
Whether you do lumpsum or SIP, the key is how long money stays invested.
Lumpsum helps compounding start early. SIP creates compounding gradually.
In long term (15 years):
Lumpsum grows faster if invested at right level
SIP grows steadily but reduces entry timing risk
Both will give good results if fund is right
So yes, lumpsum helps compounding better if done at right time.
But STP gives you that benefit with safety.
You get smoother growth and still early compounding.
Ideal Strategy for Your Case
Let us now give you a proper, full-scope recommendation.
Step-by-Step Plan:
Redeem the underperforming fund.
Park the money in a liquid mutual fund (not savings account).
Start a 6-month STP to a high-quality active mutual fund.
Choose the fund after checking its 5-year, 10-year consistency.
Avoid new index funds or ETFs.
Use regular plans through Certified Financial Planner channel.
After STP ends, monitor that new fund every year.
This plan will:
Reduce timing risk
Start compounding early
Bring emotional comfort
Keep your investing smooth
Increase overall return stability
Additional Things to Keep in Mind
Since your money is being shifted, some more factors to remember:
Mutual Fund Capital Gains Tax Rules (Updated):
Equity fund LTCG above Rs. 1.25 lakh taxed at 12.5%
STCG (below 1 year) taxed at 20%
These are recent rules. Plan redemptions smartly
Avoid frequent switches to reduce tax impact
Emotional Behaviour Risk:
Do not panic if market dips during STP
Do not stop investing after seeing short-term fall
Compounding works best when you do not interrupt
Yearly Review Required:
Check your fund’s performance yearly
Compare with peers in same category
Use this to decide future additions or redemptions
Work with a CFP to do regular health check-up of portfolio
Finally
You are thinking smart. Trimming funds and reallocating is a sign of maturity.
But always shift money with a goal and method.
Use these steps:
Avoid underperforming and index funds
Reinvest using STP into active mutual funds
Prefer regular plans with CFP guidance
Let money stay invested for full 15 years
Don't check NAV daily. Focus on yearly growth
Review fund quality yearly
Avoid timing the market too much
Stick with this method and your wealth will grow steadily.
Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
