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.
It is true that staying invested in mutual funds for longer periods will 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.
2. Conditions When Exiting a Fund Becomes Necessary
We have told you before how it is of utmost importance that you keep a 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:
a. Consistent poor performance of the fund
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, simply exit the scheme.
b. Change in the investment objective of the fund
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.
c. Rebalancing of portfolio
At the beginning of your mutual fund investment, you establish an asset allocation. Imagine your target allocation in equity: debt is 50:50.
After 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 favorable 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 favorable.
d. Achievement of the personal financial goal
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 huge corpus to lead a comfortable post-retired life.
You started investments in an equity fund. Imagine that right now 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.
e. Change of the fund manager
This can become one of the major 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 in a continuous fashion.
If you are dissatisfied with your fund manager’s decision, then exit the fund. You can look for alternate funds that are consistent with your objectives.
3. Things To Know Before You Exit the Fund
It’s important to choose your alternatives before you exit a fund. You need to ensure that the new fund is in sync with your needs, too. 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, you can redeem the merged 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 does not cause you huge losses.