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Exiting mutual funds should be an informed decision as your investments would stop earning returns for you. We have covered the following in this article:
As an investor, you need to keep one point in mind. Anybody can enter the capital markets at the right time, but only a wise investor can exit at the right time.
Staying invested in mutual funds for more extended periods will indeed get you good returns after the investment duration is over. Especially when it is equity funds you have invested in, a long-term horizon helps to get the best out of your investments. But there are certain situations which might require you to exit before the said period. Here are a few of such occasions when exit becomes a necessity.
We have told you before how it is of utmost importance that you keep track of your investments. Asset allocation and diversification can negate market fluctuations to a certain extent. However, at times you may have no other choice than to exit the mutual fund you are invested in. Below are some scenarios in which exiting is the best choice you have:
If your fund is tending southwards in a consistent manner, the time has come to take a fresh look at it. However, a single month’s poor fund performance should not trigger you into a defensive mode. Instead, compare the fund performance with the average for at least four quarters. There can be a number of reasons behind your fund’s dipping performance.
It might have taken exposure to an unsuitable sector or theme at an inappropriate time. In yet another case, your debt fund might have invested in low-credit rated securities and failed to earn high returns as planned. The worst-case scenario is when your equity fund underperforms an index fund. If your fund’s inferior performance can be attributed to any one of these, exit the scheme.
When you invest in a mutual fund scheme, you ensure that your investment objective is in line with that of the fund. But what happens when your fund is going on a transformation spree? It could be planning to become a pharma fund from a diversified equity fund. This would expose the fund to higher levels of risk like concentration risk. There can be a situation wherein your fund is getting merged with some other scheme. In yet another instance, your balanced fund might plan to change its orientation. All these situations modify the core character of the fund. If you are not happy with a change in the basic profile of your scheme, then exclude it from your existing portfolio.
At the beginning of your mutual fund investment, you establish an asset allocation. Imagine your target allocation in equity: debt is 50:5After completion of one year, your target allocations might have skewed. It might be the result of the recent rally increasing NAV of the equity component of the portfolio.
Or, in another case, a macroeconomic policy shift may have made large-cap stocks more favourable over others. All of these would trigger a portfolio rebalancing. In this, you sell those funds which have become irrelevant in the current context. You invest that money in other funds which look more favourable.
The entire purpose of mutual fund investing is to achieve your financial goals in a systematic and planned manner. You might have a goal say accumulating a considerable corpus to lead a comfortable post-retired life. You started investments in an equity fund. Imagine that you are a couple of years away from your retirement.
Owing to a volatile market, chances of a rapid fall in the fund value will be higher at this juncture. Instead of risking it all in one go, you can think of initiating a systematic withdrawal plan (SWP). In this, you can move your corpus from equity fund to a safer haven like a liquid fund. SWP would also require exiting the current fund in a phased manner.
This can become one of the significant reasons to take a relook at the fund. Imagine that your fund appoints a new fund manager. He comes up with revolutionary investment strategies that you find erratic and unreasonable. Moreover, it is causing the fund to underperform continuously. If you are dissatisfied with your fund manager’s decision, then exit the fund. You can look for other funds that are consistent with your objectives.
It’s essential to choose your alternatives before you exit a fund. You need to ensure that the new fund is in sync with your needs. For instance, if you had invested in large-cap funds because they are less risky and find that your fund has now been merged with a mid-cap fund, then you can redeem the combined fund for a fund comprised of pure large-cap units only.
Along with this, you also need to take the LTCG (Long-Term Capital Gains) tax into account and see to it that the exit and redemption do not cause you huge losses.