While it’s advisable to stay invested until you meet your Mutual Fund goals, sometimes exiting certain funds might be the right thing to do. Let’s find out why.
One of the thumb rules of Mutual Fund investing is to stay invested through market ups and downs until you reach your Mutual Fund goals. Taking the SIP route for your investments is a good way to ensure just that.
An SIP or Systematic Investment Plan allows you to invest a fixed sum at regular intervals in a Mutual Fund, typically equity Mutual Fund schemes. By opting for this investment method, investors don’t have to worry about timing their investment in terms of market conditions and they can average the cost of purchase of their Mutual Fund units over a long period.
While investing in Mutual Funds, it is important that you keep an eye on the performance of your funds from time to time. You can compare the fund’s performance against its benchmark and see if it has been consistently underperforming or overshooting it. This will help you figure out if you should exit your Mutual Fund at the right time or not. However, even if your fund is performing well, it may be a good idea to exit your fund owing to the following reasons:
Your portfolio needs rebalancing:
When you set out to invest, it’s imperative that you begin with a goal in mind. Having a goal in sight will help you decide when you’ve reached it and you can exit from your investments accordingly. However, as you get on with life, with growing responsibilities and liabilities, your goals are bound to change. A shift in your goals may call for a rebalancing of your portfolio.
Take for instance the example of 52 year old Mr Ravikumar Reddy. Mr Reddy has been investing in equity-oriented Mutual Funds from the age of 30. However, as he approaches retirement, Mr Reddy will need to rebalance his portfolio in order to reduce the risk and move in favour of debt-oriented Mutual Funds.
As you near your financial goal, it is a good idea to take a step back, assess your portfolio and shift your investments to less risky options like balanced or liquidity funds.
Additional Reading: Mutual Funds Starter Pack: 8 Things To Keep In Mind Before You Start Investing
Fund is not performing well compared to its peers:
Even if you’ve picked a high-return yielding fund to invest in (offering returns between 11%-15%), when compared to its peers in the category, it is possible that the other funds are offering much better returns (18%-20%). In such case, you may want to move out of this fund and invest in one that is performing better. If a fund is performing well, assess its performance relative to other funds in the category and shift to another fund if it’s not performing too well.
Fund management team has changed:
It is possible that you decided to invest in a fund based on the fund manager’s track record. You may consider dumping these funds if the fund manager quits and gets replaced by someone whose track record you are not happy with. A merger or acquisition of your fund may also lead to changes in the fund’s risk and return profile. If the new firm’s objectives and investment policy is not in line with your goals, you should consider moving to a different fund.
Additional Reading: How To Make Mutual Funds Do The Hard Work For You
You have reached your financial goal:
When investing in Mutual Funds, it’s crucial that you outline specific goals that your investments would help you achieve. For instance, if you’re investing in Mutual Funds that will enable you to create long-term wealth for purposes like your child’s education, marriage or buying a house etc. for a period of 10 years, you must exit this fund after the said time period.
Even if your fund is doing well, you should have the wherewithal to quit. Staying invested well beyond your expected time period can even negatively impact your returns.
Changes in macroeconomic environment:
Another reason to exit a fund could be due to changes in the macroeconomic environment like policy changes by the government or regulator may render some funds less tax-friendly. If changes of such nature impact the risk and return profile as well as the investment objective of your fund, consider moving to a different fund.
Additional Reading: Are Fixed Maturity Plans (FMPs) Right For Your Retirement Portfolio?
While some might advocate that the best way to invest in Mutual Funds is to invest and forget about your money during the investment period, given the nature of Mutual Funds and how closely linked they are to the vagaries of the market, it is crucial that you keep a track of their performance to check if they aren’t veering too far off from your investment goals.
Unless you encounter any of the above scenarios, remember that when investing in Mutual Funds, it’s important to stay invested for at least 5 years to get considerable returns from your investments.
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