6 Best Reasons When To Exit a Mutual Fund Investment

6 best reasons when to exit a Mutual Fund Investment.

When to exit a Mutual Fund Investments

Many a time in the social media platforms we find one question that what are the reasons when to exit a mutual fund investment. In social media platforms, you would find lots of advice regarding when to buy, how to buy, what to buy a mutual fund product.

Having received this question today I have decided to write this article on 6 Best Reasons when to exit a Mutual Fund Investment/should I exit from mutual funds?

This is quite true that everyone is advising us to invest in equities but you would hardly find an expert here and there to suggest you when to exit a mutual fund investment.

If you don’t know when to exit a mutual fund investment, your whole investment principles may get distorted and your financial dreams may remain unfulfilled.

⇒When to exit a mutual fund investment?

Most of us give too much importance in selecting and buying mutual funds. But seldom you would find that kind of importance in selling or exiting a mutual fund scheme.

But how can we forget that both buying and selling is part of our financial planning process? Let’s not forget that “Exiting from equity market is as important as investment in the equities. Both are equally important”. 

Few relevant points to remember while investing in equities:

Your investment in equity and equity-related products should match your investment goals or objectives;

Ascertain the amount that you need for meeting your future financial needs along with the time frame or tenure. Financial

objectives are such as buying a house after 5 years, buying a car after 4 years, or funds required for self-marriage and alike goals;

Try to take the advice of fee-only financial planners, who can tell you exactly which investment is best suited for your financial goals. Saving a few thousand rupees as their fees may cost you lakhs of rupees in the later future. This is obvious and you can’t ignore the reality in the long run;

Don’t invest in equities for short term say below 5 years. Otherwise, it may so happen that when you actually need money for some purposes, the market has gone in correction mood and your investment did not fetch your desired return as you wanted;

The longer you remain invested, your investment is likely to make you compounding return and it is exposed to a lesser amount of risk.

As your investment would get many ups and downs during this phase but a longer tenure of 10 to 15 years would help you in accumulating more units of mutual funds, that help you in earning a reasonable return;

Don’t panic during a volatile market. Equity can not give you a fixed return for perpetuity. Some years it will give negative returns and some years it will give a return as good as 30% plus in a year.

That is the whole beauty of equity investment. If you stop your investment during volatility, your whole investment objective is ruined due to your stupidity;

If you do not follow the above recommendations exclusively, you are quite likely to make your equity investments exposed to a great amount of risk.

Also, you should remember that mutual fund is a medium for creating long term wealth and should never be perceived as a tool for short term earning.

Pension plans and Systematic Withdrawal Plans(SWP) are not in line with creating wealth so keep them aside for the time being.

⇒What are the 6 best reasons when to exit a mutual fund investment?

As I said earlier that you should give some kind of attention towards when to exit from mutual fund investments as you give in fund selection. If you don’t know the reasons how would you come to know about the right time for the redemption of your funds?

1. Financial emergency in your family (Reasons when to exit a mutual fund)

In case there arises any unprecedented financial emergency in your family, you are likely to redeem your mutual fund investments. Though this is not an ideal situation for you.

But if you have not already planned for your financial emergencies, you may have to deviate from your predetermined financial goals. That’s why financial planning is most important for making your future dreams come true.

So, this reason may lead you to exit from mutual fund investments.

2. You have achieved your financial goals (Reasons when to exit a mutual fund)

I do personally believe that mutual fund is solely meant for creating long term wealth and completely not for earning short term gains. Therefore, it is very much imperative that you should exit from a mutual fund scheme.

Because your financial planning has helped you to align your financial goals to your mutual fund investments.

Don’t be too greedy. Otherwise, it may so happen that while you are planning to withdraw money from mutual funds( after reaching your desired goals), the market has gone to a correction mode.

You may want to read the following:

That may cause you losing some amount of money. Thus, the ideal situation is that when you’re 12 to 18 months away from reaching your goals, you should withdraw your money from mutual fund investments irrespective of the market scenario and park the entire amount in relatively safer instruments like bank fixed deposits, liquid funds. That’ll protect your wealth from further erosion.

So, this is highly recommended that once you have reached your goals like purchasing a car or house, child marriage, child education and creating retirement corpus, you should exit from mutual fund investments.

3. Portfolio rebalancing (Reasons when to exit a mutual fund)

Rebalancing your portfolio is one of the most crucial parts of the financial planning process. Every investor has a different risk-taking ability depending upon his financial position.

Suppose, an investor has started his financial planning with a view to investing in a mutual fund scheme 5 years ago with a portfolio allocation of 60-40 i.e. 60% in equities and 40% in debts. But today after 5 years, his portfolio has skewed towards equities and current portfolio allocation is 80-20 in equity and debt respectively.

This allocation is not good for his financial health according to his risk profile. Therefore, once an investor has crossed his predefined portfolio allocation, he must exit his from the mutual fund investments in line with his overall risk proposition. Thus, managing portfolio risk should also be one of his priorities.

4. Consistent underperformance of the fund (Reasons when to exit a mutual fund)

As a prudent investor, you should regularly (not daily) monitor and review the performance of your mutual fund scheme. If a fund has shown consistent underperformance or continuously underperforming as compared to its benchmark and its peers, you should analyze the reasons for such underperformance and take an exit call based on that immediately.

But your exit call should not be based on short term underperformance say for 6 months or so. You must exit the under-performing schemes only if it underperforms both its peers and benchmarks at least for more than 1 and a half years or so.

Underperformance leading to short term volatility should not be considered by you at any cost. Your fund can not perform well when the overall market is not doing well.

5. Change in your risk profile (Reasons when to exit a mutual fund)

Financial planners or advisors always suggest a financial product based on the investor’s risk profile. This is a must for financial products. But it should also be aligned with your risk profile like you can not ask a 60 years old retired person to invest in a lump sum amount in a small-cap fund for regular earnings.

Similarly, you can not ask a 25 years old investor to invest all his money in fixed interest-bearing instruments for a very long term period.

Financial instruments are being offered ideally by the advisors calculating one’s risk-bearing ability. During an investment phase, an investor’s risk-taking ability keeps on changing due to some unforeseen reasons.

For example, initially, an investor started investing as an aggressive investor but due to his recent change in job has made him a conservative investor. In that case, now he is supposed to change his investment pattern as well.

Therefore, he should now exit his equity investments and invest in relatively less risky instruments like a debt fund.

6. Change in fund’s objective (Reasons when to exit a mutual fund)

If your fund has changed its investment objectives which is not in line with your investment objectives, just consider this the right time for you to exit from the equity mutual fund scheme.

Because the fund is now not meant to be suitable for you as it used to be earlier. The fund has shifted from its previous objectives and this may hurt your investment objectives badly.

For example, if you have invested in mutual funds diversified scheme and later the fund manager has decided to make this fund a large-cap fund fully.

So, there should not be any cushion from your side regarding the change in investment principles of any fund that you are already invested in.

Conclusion on 6 best reasons when to exit a Mutual Fund Investment
When to exit a Mutual Fund Investment

To conclude on 6 reasons to exit a mutual fund investment, I would say that kindly put in the same amount of effort as you put while selecting a mutual fund scheme.

It will help you in managing your money for meeting your particular goals. While doing so, it may so happen that if you are invested in an equity fund and your actual return did not match your expected return.

Don’t get despair. Because it may be that your investment did not do well due to the whole market did not do well. That is why you need to invest for longer tenure say at least for 7 to 10 years for long term wealth creation.

During this phase also many ups and downs may come, but your continuous investment in SIPs would help you to lower down your average cost of investments significantly.

Subscribe to ArthikDisha if you liked this post.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.