When to Exit a Mutual Fund Investment

Financial Services Intermediaries usually focus on various factors while promoting a mutual fund to the investors, but seldom do we give any importance to the factors that warrant exiting an investment. While the benefits of investing, especially in equity funds, are derived in a longer time frame, that doesn’t mean one should forget about these investments and only take a look at them as the goal nears its target. This is because there are various factors that impact the growth journey of investments. Here I would like to highlight the importance of the right time to redeem mutual fund investments in the financial planning process and look at the major scenarios under which investors should be advised to take an informed decision to exit their mutual fund investments.

*When to sell* While it’s true that mutual fund investments should be for the long term, a smart investor must also know when to make an exit and sell his or her mutual fund holdings. For most investors though, deciding when to sell their investments poses one of the biggest dilemmas of investing. In fact, one of the most common mistakes that investors make is that they react to the short-term movements of equity markets and sell when the market falls, thereby missing out on the long-term gains from equity.

We all know the story of Abhimanyu in Mahabharata who knew how to enter the ‘Chakravyuha’ but didn’t know how to strategically exit, which unfortunately led to his death. In a similar way, when investing in the market the possibility of losing your money, especially if you are in it for the long term should be explained to the investors. A smart investor should always outline an exit strategy when he gets close to his goals. Though mutual fund investments are for the long-term the investor should be advised when to exit and sell his holdings.

Having said that the common mistake advisers make is to switch portfolios as a reaction to the short term market movement.

*Now the question arises - Which is the right time to exit?* One definite time to exit is when a fund has consistently under- performed the benchmark over a period of time. It is important to not go only by the fund’s semi-annual performance.

The other time is when the fund changes its mandate. For instance, if a fund changes its mandate from a diversified equity fund to a large-cap fund which may or may not be able to generate much alpha compared to its previous positioning. If the mandate does not suit the alignment of the investors' financial goals, it is time to exit the fund.

Sometimes when the investor begins with certain goals in mind and due to some unfortunate and unforeseen circumstance, he may be advised to alter his plans or goals to suit his revised requirements. It is at such critical times that it becomes important to plan an exit strategy by selling some of his investments and deploying some funds elsewhere.

Underperformance by a mutual fund may not be the only reason to exit an investment. Here’s why you should quit despite the fund performing well.

*1. You need to rebalance your portfolio* If you are rebalancing your portfolio, it may be reason enough to dump some funds and opt for others that are in sync with your goals. The triggers for rebalancing could be many. For instance, you may need to alter the risk profile of your portfolio due to age, say, when you are approaching your 50s. In such a case, you would want to move from an equity- oriented to a debt heavy portfolio. Proximity to a financial goal could also mean that you move out of equity-oriented funds and opt for safer options like balanced or liquidity funds.

*2. Fund is not performing as well as its peers* It is possible that your fund is giving high returns, say 15% over a specified period, which may seem acceptable to you in isolation. However, if you compare it with its peers and find that others are giving 18-20% and your fund is lagging far behind, you may want to move out of the fund and invest in a better performer. So a fund may be delivering high returns, but its performance should be seen relative to the category’s performance. If it does not match up, shift to a better fund.

*3. You have reached your financial goal* Ideally, one should align one’s investments in mutual funds with specific goals. So if you invest in an equity fund for 10 years for your child’s education, you will need to exit after this period as you will require the money. Have the discipline to quit even if the fund is doing exceedingly well. Don’t get greedy for higher returns. For instance, if you were supposed to exit in 2017, but did not do so due to the bull run, you would have suffered a loss when the markets fell in 2018. You are jeopardising your goal by not exiting when you should.

*4. Fund objective has changed* If the fund changes its objective regarding risk or return in a way that it is not aligned with your objective, you should quit even if the fund is performing well. For instance, if you had invested in a conservative hybrid fund, but it raises its equity holding, or a thematic fund starts including scrips not related to the prescribed theme, it is time to switch your investments to a fund that sticks to your portfolio’s risk and return profile making it safer to reach your goals.

*5. Fund management team has changed* If a merger or acquisition of the fund leads to a change in the management team or the fund manager quits, you could consider bailing out under some conditions. If the fund’s investment policy or objectives change and are not in sync with your goals, or you are not comfortable with the new team and believe the performance may be impacted in future, you could consider shifting to a different fund. You can also move if you are not happy with the new fund manager’s track record.

*6. Fund overshoots median returns or benchmark* It is possible that the fund has performed well over several quarters, but significantly overshoots or falls below the median returns or benchmark during this period. In such a case, even though the fund is doing well, you should quit and go for a less risky option. It may be a high beta fund with excessive volatility and the upside or downside swing may be huge. If you have aligned the fund to a particular goal, it may not be a good idea to retain the volatile fund in your portfolio taken in by the high returns. The risk associated with such funds may not be worth the promised returns.

*7. Changes in macro- economic environment*

If there are changes in the macro-economic policy by the government or the regulator, and the fund does not align with these or these are likely to impact it in the long run, it may be a good reason to move out. For instance, if a Budget announcement renders some funds less tax-friendly than others, you may want to shift even if the fund performance is good as it may impact your returns in the long run.

To know more about Mutual Fund Investments, you can visit our website http://www.jayantharde.com/ or contact our representative at +91 712 2282029 or meet us at 51, Gurukripa, Old Sneha Nagar, Wardha Road, Nagpur – 440015.