scorecardresearchExiting a mutual fund: Know the right time to do so

Exiting a mutual fund: Know the right time to do so

Updated: 18 Aug 2022, 08:29 AM IST

Exiting mutual funds should be done with caution because your assets will no longer generate income for you. In order to maximize their gains, investors must follow the right actions when selling units or terminating mutual fund assets.

In order to maximize their gains, investors must follow the right actions when selling units or terminating mutual fund assets.

In order to maximize their gains, investors must follow the right actions when selling units or terminating mutual fund assets.

When it comes to mutual funds, some major aspects that might influence your action are the investment amount, the time frame available to reach the target and the mutual funds you choose based on your risk tolerance to help you reach your objectives.

But the job of an investor does not finish with investing in the funds of his or her choice. It's also crucial to know when to exit a mutual fund. Instead of making rash judgments about mutual fund redemptions, investors should be mindful of trigger points other than current market conditions in order to make timely decisions about mutual fund withdrawals.

After the investing period is complete, staying involved in mutual funds for a longer length of time will yield favorable results. However, there are some circumstances in which you may need to leave before the time limit has expired. Here are a few circumstances when you should exit your mutual funds.

Upon obtaining the desired financial Goal

Mutual fund investments should always be in line with your financial objectives. You should always redeem your current mutual funds if you've met the financial goals you set for yourself with those investments.

Consider shifting your equity mutual fund investments into less risky instruments such as high yield savings accounts, fixed deposits, or short term debt funds if your financial goal is only a year away from maturity and your mutual fund investments have already reached or exceeded the target corpus. This will help to reduce the risk of capital loss to your desired amount that has already been built up

Upon changes in the risk appetite of the investor

Changes in income or financial objectives, as well as long-term financial stress, can all have a substantial impact on your risk appetite. These changes may result in a skewed risk profile in your current portfolio, necessitating portfolio rebalancing to fit your updated risk appetite.

For example, if your investment portfolio has a high risk character and is heavily weighted toward stock funds, and you suddenly experience income interruption or other economic difficulties. In such cases, the necessity to guarantee a higher level of capital protection for your total investment portfolio may necessitate a cut in stock exposure in favor of less risky assets like fixed deposits or debt mutual funds.

Upon constant underperformance of the fund

Only when a mutual fund consistently outperforms both its benchmark indices and comparable funds in terms of profitability is it regarded to be successful. If your current mutual funds have regularly underperformed their benchmark indices and peer funds for more than three quarters in a row, you might consider redeeming them.

Due to fluctuations in the economic cycle of the mutual fund's portfolio members, even a sector or theme fund may underperform at times. If you are certain that such funds are likely to be stagnant for a significant duration, you should avoid them.

During portfolio rebalancing

You decide on an asset allocation when you first start investing in mutual funds. Assume you want to allocate equity debt in a 70:30 ratio. Your goal allocations could be skewed once a year has passed. It might be the consequence of the stock component of the portfolio's NAV growing as a result of the recent gain.

Alternatively, a change in fiscal and monetary policy may have favored large-cap stocks over others. All of them would result in a rebalancing of the portfolio. This is where you sell any funds that are no longer essential in the present market. You put that money into other funds that appear to be more promising.

Upon change in the aim of the investment scheme

Every mutual fund arrangement discloses its investing and asset management framework to assist you determine if it is a good fit. Any change in the investment goal of a fund might have an impact on its acceptability for you. As a result, if your existing mutual fund investment no longer meets your financial goals, you should redeem it.

Consider the case where a large cap fund in your holdings converts to a flexi-cap fund, posing a larger risk than your acceptable risk level. In this case, you should redeem your mutual fund investment and replace it with another large cap fund that matches your risk tolerance level and investment approach.

One thing to remember as an investor is that anyone may enter the financial markets at the appropriate moment, but only a smart investor can depart at the appropriate time. As a result, they must take the proper steps when selling units or terminating mutual fund assets in order to maximise their returns.


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First Published: 18 Aug 2022, 08:29 AM IST