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June 27, 2018

When to exit a mutual fund?

Most of us give much-needed attention to various factors while buying a mutual fund, but seldom do we give any importance to the factors that warrant selling a mutual fund investment. While the benefits of investing, especially in equity funds, are derived in a longer timeframe, that doesn’t mean one should forget about these investments and only take a look at them as the goal nears its target. This is because there are various factors that impact the growth journey of investments. In this edition of Fund Insight, we highlight the importance of the right time to sell mutual fund investments in the financial planning process and look at the major scenarios under which investors could take an informed decision to exit their mutual fund investments.

 

When to sell?

 

While it’s true that mutual fund investments should be for the long term, a smart investor must also know when to make an exit and sell his or her mutual fund holdings. For most investors though, deciding when to sell their investments poses one of the biggest dilemmas of investing. In fact, one of the most common mistakes that investors make is that they react to the short-term movements of equity markets and sell when the market falls, thereby missing out on the long-term gains from equity.

 

Here are some of the scenarios when an investor could consider selling and exiting from a mutual fund investment:

 

Fund is consistently underperforming: An investor must regularly monitor his or her mutual fund holdings to weed out the under-performers. Thus, if a scheme consistently underperforms vis-à-vis its benchmark and category returns, an investor should take a fresh look at it and after determining the cause for the under-performance, take a call to exit the scheme and invest in a better-performing scheme in the same category. The investor must not base his decision on short-term underperformance of a quarter or two, however, but only exit if the scheme is under-performing for a longer period.