If an entry in an investment such as a mutual fund is hard, exit is even harder. Investors don’t want to sell their winners early and they don’t want to hold on to their losers longer than necessary.
An investor should look at exiting a mutual fund or a class of mutual funds only under these scenarios:
When asset class becomes expensive
According to Anup Bansal, Chief Investment Officer at Scripbox, an investor can consider exiting the mutual fund in case the asset class, as a whole, has become expensive compared to historical averages due to market appreciation, and the allocation has increased beyond the prescribed range.
“If the allocation to small-cap funds is supposed to be in the range of 10-15 percent and has lately increased to 20 percent, then an investor may want to trim allocation in the respective funds proportionately,” Bansal said.
When fundamentals of product changes
As per Bansal, an investor can also exit the mutual fund when the fundamentals of a product change compared to the original investment thesis.
“For example, if a mid-cap fund strategy is ‘value investing’ and has changed to ‘growth investing', then investors may warrant a relook at this mutual fund to ensure that it fits the overall portfolio strategy. One compelling reason to exit here would be a change in the fund manager,” Bansal says.
In case the investor requires liquidity for any emergency
In case an investor requires liquidity for a goal or an emergency, Bansal says that he/she can exit the mutual fund.
“Financial planning will typically plan these exits in a systematic and phased manner so that there is minimal disruption to the portfolio,” Bansal adds.
When goals are achieved
Usually, when one invests money, they have a specific goal in mind.
According to Abhinav Angirish, Founder investonline.in, when an individual has just begun investment or is investing for long-term goals, market levels should not bother him/her much. Ideally, they should withdraw investments only when one's goal is achieved.
Factors to consider while exiting a mutual fund:
An exit from a mutual fund should factor in tax implications, exit loads, and opportunity cost.
Additionally, Angirish said that if there are warnings signs such as unjustifiable high valuations or euphoria, and if investors are inclined to withdraw investments, they must not withdraw over 25 percent in one go as they may never know that what may be expensive for them may not be for the markets.
“While investing it is not advisable to look at market levels. Investors should remember that higher valuations do not always mean that the market is expensive. Hence, if individuals are SIP investors and they have invested to withstand the volatility in the markets, they must not stop SIP under any circumstances," Angirish opines.
Important decisions such as exiting the market should not be taken on assumptions or a hunch. One should always consult their financial advisor to make the right decision.
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