Mutual Funds | An exit strategy for MF investments
Knowing when to sell is as important as knowing when to invest. Make an informed choice, do not let emotions dictate the decision to exit a mutual fund investment
The buzz around mutual funds (MFs) over the past decade has made it the go-to investment tool for many Indians. The virtues of MFs rest on their being a simple and effective solution: delegation to professionals, low entry costs, diversification across assets, and safety through a well-regulated structure. You are encouraged to invest with whatever small sum you can, and experts say you can start right away—it is always a good time to invest. It almost appears as if people who start investing in MFs stay invested forever. That, however, is not the case, according to AMFI (Association of Mutual Funds in India) data, which indicates that 90 per cent of SIP investors stop within 5 years.
The buzz around mutual funds (MFs) over the past decade has made it the go-to investment tool for many Indians. The virtues of MFs rest on their being a simple and effective solution: delegation to professionals, low entry costs, diversification across assets, and safety through a well-regulated structure. You are encouraged to invest with whatever small sum you can, and experts say you can start right away—it is always a good time to invest. It almost appears as if people who start investing in MFs stay invested forever. That, however, is not the case, according to AMFI (Association of Mutual Funds in India) data, which indicates that 90 per cent of SIP investors stop within 5 years.
In general, your investment decisions should depend on your financial situation, financial goals and risk tolerance. Global events, the state of the economy, the flux in the markets, all these can make you doubt your investments. It is natural to think about switching things up if you are not seeing the returns you hoped for or if life circumstances change and there is a squeeze on your finances.
So, it is just as important to have a plan for when to sell an investment as it is for when to buy. Selling, like buying, is part of the investment process, and it isn’t just about performance. Just as investments shouldn’t be impulsive, you should have a well-thought-out exit strategy that weighs the pros and cons against your current situation and financial goals. Let us look at 5 reasons to consider exiting a mutual fund.
1. TIME TO REBALANCE: Asset allocation, diversification and rebalancing are the fundamental tenets of investing. A balanced portfolio involves allocating investments across various asset classes, in proportions that align with your risk tolerance, time horizon and investment strategy. Rebalance your portfolio regularly, whether on a schedule or in response to broader market changes. Exiting investments in some funds to redirect the redeemed proceeds to others is something you should do periodically.
2. THE GROUND HAS SHIFTED: Change is inevitable, especially with regard to financial needs. It could take the form of a new job, an increase in income, a new addition to your family, or life events that affect your financial situation and goals. At such moments, you need to revisit your investment strategy. Change could also take the form of an economic outlook, a shift in demand or supply, a change in the fund management team, or even another fund that is outperforming the one you have invested in.
3. REACHED YOUR FINANCIAL GOALS: You are close to achieving the goal towards which you were investing. For long-term equity fund investments, the exit plan often begins before the goal is fully met. You need to gradually shift investments from the fund you have invested in to other financial instruments, where the accumulated sum remains safe from market variations. Consider keeping the money in the bank for a short period or in funds that provide similar options.
4. A SHIFT IN RISK: As you gain experience with investing, your perception of investment risk changes. Your investment timeline and tolerance to risk are often closely related. In general, the sooner you need your money, the less risk you may be willing to take on, and the more conservative you may want to be with your investments. The longer your time horizon, the more risk you may be willing to take on. This could mean investing in more aggressive funds, which may be relatively volatile compared with bonds, but also offer the potential for higher returns.
5. POOR PERFORMANCE: All funds undergo phases of weak and strong performance. A single year of underperformance is not sufficient reason to exit, as market cycles may affect even well-managed schemes. However, if your fund consistently trails its benchmark and category peers over two to three years, it is a warning sign. You should also compare the rolling returns posted by the fund you have invested in across different periods against those of peers and benchmarks. Consistent underperformance of a fund without a clear strategic reason suggests it is time to switch.
Apart from the above reasons, you may think of exiting a fund because the markets are touching new highs, prompting you to book a profit. Then, there are investors who redeem investments as a tax harvesting strategy. Ideally, it is not the best reason to exit, but it could work for some people in certain situations, wherein they could offset losses against gains elsewhere. Do make such exit decisions in consultation with a tax expert.
