Ideally, while investing in a mutual fund (MF) one checks into the parameters of its objective, performance and the expenses along with the fund house and fund size. Also, a more informed investor looks into the technical evaluations of Standard Deviation, Beta, Sharp Ratio and R-squared before considering a particular fund.
Mutual funds best for faster liquidity
Of course, one weighs their investment horizon, risk appetite and timeline before finalising on an investment. But, what should one look to exit from a fund or when should one exit from an existing investment of a MF, this is a conundrum. The most common reasons an investor exits a MF are: making losses, urgent requirement for liquidity, affordability to continue to invest, market timing and needs.
For instance, if a fund’s objective is to invest predominantly in defensive sectors like Pharma, FMCG, etc. and the current market situation is helping cyclical stocks of Infrastructure, Banking, Industrials, etc. then the fund is bound to underperform the broader market index. In such a case, the investor has to check on how it’s performing against the benchmark and then the peer group.
Also, seek help from a professional as to find out any possibility of revival in the market scenario that warrants retention of the fund in your portfolio. In such situations, one has to wait and watch for at least couple of quarters to check for any improvement. Also, a staggered way i.e. in a phased manner, one could reduce the exposure if they sense an underperformance in the fund. In a way when exiting a fund, one should consider all the parameters that were used while choosing a fund.
If the exit is planned i.e. for a need-based requirement, the ideal way to execute is to start moving to debt from equity as the timelines near. For instance, if the need is in 2 years’ time, one could partially move the fund to debt through profit booking and ensure the amount is available for the need. This way one not only builds up the corpus but is ready to fulfil the need.
Life throws up surprises and the beauty of MF investment is its provision for liquidity. One could pull out the entire money (there could be an exit load) from an existing investment at any given point of time. If affordability is an issue and in case of a SIP investment, one could continue to invest in the fund post the withdrawal or retain the existing fund and stop further contributions or do both. Such is the flexibility provided in a MF investment that an investor could restart the investment even at any later time without any penalty. (The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at email@example.com)