When To Exit A Mutual Fund?

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In recent times, mutual funds have emerged as one of the best investment options available in India. There are many valid reasons for the popularity of mutual funds in the investment market. For example, it takes as little as Rs. 500 to invest in mutual funds, so it attracts a large population belonging to different economic classes and financial statuses.

In mutual funds, money is pulled from different big and small investors and then professionally managed by the AMC (Asset Management Company). That’s why small investors with a low amount of investments also get a chance to get their money managed by top financial experts, which otherwise would have been a costly service. Mutual funds also offer a variety of options regarding the maturity period, returns or risk factors, so it suits the different needs of different individuals. It is also very easy to invest in a mutual fund quickly. For all these reasons, mutual funds are so popular nowadays.

Before you start investing in a mutual fund, it is important to consider a lot of factors such as your financial goal, your risk bearing abilities, the term of maturity of a particular fund, the fund manager and his expertise and so on. For example, if your financial objective is capital gain, then you should consider investing in long-term investment plans that offer higher returns but comes with greater risk factors too. If you are comfortable with high risks, then equity funds are a good option of investment for you. On the other hand, if you are looking for a safer option of investments and you are okay with considerably low returns then debt funds and other short-term mutual funds are suitable for you.

Mutual funds generally give you better returns than the fixed deposit, and risks are low too. However, you must keep in mind that no mutual fund comes with a guaranteed return like savings accounts or fixed deposits. There is always a risk factor involved with mutual funds. While some of them might be less volatile than others, no mutual fund is 100% risk-free. While selecting a mutual fund for yourself, it is important to consider these factors thoroughly.

While there are many reasons to start investing in mutual funds, there are just as many reasons to quit. Choosing the right mutual fund at the right time is important. Generally, we pay more attention to the facts that decide our investment options such as which mutual fund to choose and when is the right time to start investing, but  in order to gain the maximum profit and save yourself from unwanted losses, you should know very well when to exit a mutual fund.

Many mutual funds have exit loads. Exit load is a fee that is charged when you withdraw your money from a mutual fund investment before the completion of the lock-in period. Exit loads are charged to discourage investors from withdrawing their money too soon and encourage them in long-term investments.  However, there are certain cases during which you should consider exiting a mutual fund schemes. The reasons are addressed below.

Continuous Under Performance of the Mutual Fund

 Mutual fund returns are not the sole reason for exiting a mutual fund, but it is an important one. If your fund is underperforming consistently, then you should consider withdrawing your money from that mutual fund. After all, your goal is to make money, not to lose it. However, decisions should not be based on a single month’s performance, or even a quarter or two for that matter. If your fund shows below average returns consistently for four or more quarters, then you can consider the quitting option. If you have invested in an equity fund and it’s earning lower than index funds consistently, or if you have invested in debt funds which is taking unnecessary risks, then these can be a good reasons to exit the mutual fund

Your Financial Goal is Achieved

When you invest in a mutual fund, you have a goal set in your mind. For example, if you have invested in a long-term mutual fund for capital growth to buy a house for yourself, once it’s done, you may consider your financial goal fulfilled. In such cases, there’s no point in continuing to take risks, and you can consider the withdrawal option. However, if you are in a financial position where you can afford such risks for longer periods, and your fund is performing well consistently, then sticking to it will be wiser. On the other hand, if your fund performs poorly for a long time and you believe your financial goal cannot be achieved from this mutual fund, then it is wiser to exit the mutual fund.

Investment Objective or Core Features of the Fund Changes

When you select a mutual fund for yourself, you ensure that your needs and investment capacities match with the objectives and features of a mutual fund. But halfway through the investment tenure, if the fund decides to go through changes, that might lead you into an uncomfortable position. For example: you opted for moderate risks while investing, but suddenly the fund objective is changed, and it is now investing in high-risk stocks. Than in that case you might not be up for the added risk bearings. It can also happen that you opted for a high-risk and high-return mutual fund, but suddenly they are moving towards safer, low-yielding investments. In that case, the mutual funds return that you expect to gain over a certain period cannot be reached. In both cases, quitting the mutual fund is a logical and practical solution.

Rebalancing your Portfolio

There are times when you need to rebalance your portfolio for various practical reasons. For example, when you first entered the investment, your equity and debt ratio was 60:40 and you were able to bear higher levels of risks. But as you grow older, your risk-taking abilities decline, and you might want to rebalance your portfolio by increasing the investments in debts and decrease the investments in equities. In such cases, it is completely acceptable to exit the mutual fund and invest in another that suits your current needs better.

Change of Fund Manager/ Disagreement with Fund Manager’s Decisions

When you invest in a mutual fund, you get to know about your fund manager, his experiences and his philosophies in investment, and if you are comfortable with all these things, then only you proceed with the investment. However, in case the fund manager changes and if your ideas do not match with the new fund manager then in such cases, quitting might be the only option for you.

Quitting a mutual fund in the right time is as important as investing in one. But we tend to overlook the red signals too often and continue with a positive outlook. While that can be the right decision, if you find more than one reason in your case, you should consider exiting the mutual funds. Your primary objective in investing is to make money and reach your financial goal. If you have already achieved it or you are certain that this fund will not help you in reaching your goals, it’s better to quit rather than hold on. Avoiding unnecessary risks is a smart idea. So when you are thinking about exiting, keep in mind these points mentioned here and make an informed decision.