When should you exit a mutual fund?

Anooj (Chartered Accountant) (2130 Points)

20 March 2012  


When should you exit a Mutual Fund?

Most of us try our best with respect to Investing in Mutual Funds so that we can purchase them at the best Price. But how many of us actually plan when to Exit of Mutual Fund. We buy Mutual funds after a lot of Research poring over Reports, websites, comparing performance and portfolio’s but very few of us actually plan before Exiting.

Exiting a Mutual Fund is as important a decision as Investing in a Mutual Fund. Here are 4 Major Reasons which should make an Investor exit from a Mutual Fund.

1. The Fund Consistently Underperforms

Always compare a scheme with its peers. If in the past few years the Scheme has underperformed as compared to its peers, it’s always advisable to exit the Mutual Fund and invest in a better performing Mutual Fund.

But never exit on the basis of performance of a few quarters, always compare over a longer period and only with its peers. Don’t end up comparing Apples with Oranges.

2. The Fund Deviates from its Objectives

It may occur that when you invested in the Fund, its main objective was to invest in infrastructure but over a period of time, it has changed its objective and started investing in Finance Stocks. If this is the case and you think that Infrastructure is still a better bet than Finance, it’s better to withdraw your Money from this scheme and invest in some other Mutual Fund.

3. You need to Rebalance your Portfolio

Asset allocation is the key to success in investing. It ensures that your portfolio does not deviate from its original path, putting your goals at risk. If you started off with an allocation of 60% in stocks and 40% in debt and find that the equity component has surged to 80%, you are carrying more risk than you are comfortable with. To rebalance the portfolio, you need to offload some of the equity oriented mutual funds and invest the proceeds in debt.

4. Your Target has been Achieved

Financial planners advise that you should invest with a goal in mind. Once your investment reaches the targeted amount, you should redeem it. There’s no point in continuing the investment even though your objective has been achieved. You will only be exposing your investments to further risk. Don’t get greedy and wait for the fund to go that extra mile. Equity returns go through a cycle and if you find at one point that your goals have been met, it is better to withdraw your money and reduce your risk.