When Should You Exit Your Mutual Fund Investment?

Most Mutual Fund investors will agree that “when to sell” is a far trickier decision than “when to buy”! While is true that long term investing works best and the best holding period for a good fund or stock is “forever”, here are four events that could make a partial or full encashment a smart decision. 

Trend peak 

Whether you’re invested into debt or equity funds, its important to understand the key underlying trends that drive returns. For instance, long-duration debt funds did well while the RBI remained accommodative to defend the economy against the pandemic. The repo rate has been at a historic low of 4 per cent for the past 11 MPCs low; but now, with the inflation projection rising to 5.7 per cent, we may well see interest rates going up in the future. Similarly, equity-oriented funds do well while corporate earnings are improving and balance sheets are strengthening, resulting in profits as well as upgrades. When their underlying trends begin to take an about-turn, you may want to book profits in your fund. Similarly, a fund that has been an underperformer within its category for 4-6 straight quarters may be considered for sale. 

Change in fundamental attributes 

Your Mutual Fund scheme may undergo material changes in the fund management team, their fundamental attributes, or even in the parent company itself – IDFC’s sale to Bandhan being a recent example. All three are good reasons to reconsider whether or not you’d like to stay put in the scheme or cash out. Similarly, a star fund manager who has been the flag bearer of a particular scheme may exit the company, bringing its future performance into question. 

Rebalancing 

Over the years, you may have piled on tens of mutual fund schemes, with many of them really overlapping in terms of sector and market cap. Not only is this operationally cumbersome; it actually goes on to affect returns as well. Owning too many funds in the same category essentially means you’ve cast the net too wide, robbing your portfolio of a good chance to outperform the broader markets by too much. In such a scenario, you’d want to consolidate your portfolio by selling the relative laggards in each category. Similarly, your annual portfolio rebalancing may warrant the disposal of certain schemes, either in part or in full, to bring your portfolio back to the asset allocation that’s in sync with your risk appetite and overall objectives. 

Goal planning 

Lastly, the most important reason - your Financial Plan may warrant the sale of certain Mutual Funds. For instance, you may have saved in Equity Oriented Mutual Funds for several years for your retirement. As the date approaches, you’d want to begin a structured de-risking process that would last for 24-36 months leading up to your actual retirement date. Don’t be tempted to hold on to volatile funds until the penultimate moment when it comes to your goal-based savings, simply because they’ve done well. Both equity and debt markets can turn on a dime as they did when COVID struck in 2020, leaving you between a rock and a hard place.