When Should You Exit a Mutual Fund Scheme?

You pay a lot of attention to different factors when buying a mutual fund. The investment objective, the track record of the AMC, and risk tolerance are crucial for you to pick the best mutual fund. However, have you considered the right time to sell the mutual fund scheme? To achieve your financial goals, you must invest in an equity fund for the long-run. Yet, the actual time-frame of the investment depends on the returns, and when you achieve the financial goals. These are some of the reasons to exit the mutual fund scheme.

You are close to your financial goals

You may invest in equity funds to achieve financial goals like buying a house or money for your children’s higher education. It is prudent to exit from the equity investment a few years before your financial goal, to protect the investment from the frequent market swings. 

The Systematic Transfer Plan or STP helps you to regularly switch a definite number of units, from one mutual fund scheme to another scheme of the same fund house. You must shift the money from the equity mutual fund scheme to a safer debt fund, using the systematic transfer plan or the STP.

The fund consistently underperforms the benchmark

There are phases when your mutual fund scheme may underperform the benchmark or even its category. However, you must take note if your mutual fund consistently underperforms the benchmark over one to two years. 

You must check if there are changes in the fundamental attributes of the mutual funds in your portfolio. If you find the changes in the investment theme to be inconsistent with your risk appetite or investment goals, you may exit the mutual fund. 

If there is a change in the fund manager of the scheme, you must take a look at the track record of the new fund manager. If you are not comfortable with the investment style, you could exit the mutual fund scheme.

Also Read: EPF Withdrawals This Year Displayed a Major Change in Saving and Investment Trends

You need to rebalance your portfolio

The strategy where you divide the investment portfolio among different asset categories like equity, debt, and cash is called asset allocation. You may invest in mutual fund schemes across asset classes. Changes in the performance of the individual mutual fund schemes may affect the original asset allocation of your portfolio. 

For example, you have set a debt-equity allocation target of 40:60. The stock market rally increases the proportion of equity in the portfolio. You will have to rebalance the portfolio between equity and debt by exiting some of the equity mutual fund schemes. You may rebalance the investment portfolio every six months to one year for compatibility with your financial goals. 

Change in your risk appetite

There are times when your ability to take a risk for a higher return may undergo a drastic change due to unforeseen circumstances. You will have to shift your investments from equity mutual funds towards the safer financial instruments. You must sell the equity schemes in your portfolio and redeploy the money as per your risk tolerance. 

Have an exit plan for your mutual fund schemes when you enter the investment. Equity mutual funds are held for the long-term, but a smart investor knows when to get out of the investment. You must monitor the mutual fund portfolio for signs which tell you to exit the mutual fund scheme. In a nutshell, you must not hold a mutual fund scheme that does not match your risk appetite and contribute to your financial goals.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in