Though there is plenty of information on investing in mutual funds, there is little information about when to exit from them. As most mutual funds are not fixed-tenor plans, people often face the dilemma of when is the right time to leave.
Understand Why and When To Exit
Let’s consider two scenarios. First, you have achieved your investing goals, and second, you fulfilled your emergency needs. If you have completed your goals, you will withdraw the funds and use them as planned, such as for education or personal use. And if there is an emergency, you would draw the money from the available options you have. However, if you have invested in a plan with no specific goal or emergency in mind, should you remain invested, even if it is not performing well?
“There are several reasons you may consider exiting a mutual fund, including a change in the fund’s investment strategy. Your investment objective must align with the mutual fund’s objective to remain invested for the long term. Also, a shift in your investment goals or risk tolerance could be the reason to exit the fund,” says Nidhi Manchanda, a certified financial planner.
According to Manchanda, another major reason to exit is “when the fund consistently underperforms for over a year. Exiting a mutual fund may be necessary to rebalance your portfolio and maintain an ideal asset allocation that aligns with your goals and risk appetite,” she adds.
So, you should routinely check your investment to ensure its performance is up to the mark and you are not losing by staying invested in it.
You must revisit your investment portfolio regularly to check its performance. If the fund is not performing well, check the category performance to understand whether it is the broader group or the specific fund scheme which is not performing well.
How Would You Know the Fund Is Underperforming?
You should closely follow the fund updates the asset management company provides periodically, as there may be reasons for any underperformance and comments from the fund manager regarding the performance. In addition, you should check the fund’s performance over time to see its growth trajectory so you may plan to exit if the fund does not perform in tandem or better than the category performance.
Manchanda says the fund's past returns should not be the only criteria to measure its performance, but you should also consider how effectively it manages the risks. “To evaluate a mutual fund's performance, investors should compare its returns to its benchmark index and category average. Consistent underperformance of the fund in this comparison indicates that it may be time to exit,” she says.
Furthermore, one should consider redeeming the underperforming funds at once and reinvesting the proceeds into the best-performing funds in the same category. However, Manchanda adds that assessing the applicable exit load and tax implications is crucial before redeeming the funds.
Sometimes, when the overall market is down, the mutual fund scheme performance will also fall depending on the investment category. In that scenario, if you are unsure what to do, take advice from financial advisors. So, just like investing, you must have a well-thought reason for exiting from a mutual fund and what you would do with the redemption proceeds.
