Most people will give you one piece of advice when it comes to mutual funds – invest regularly for a long period. While this is prudent for wealth creation, it does not mean to invest and then just forget about your mutual fund investments for the entirety of your investment horizon. It’s essential to know when to exit your mutual fund investment to make the most out of it. Here are some situations when you should consider exiting:
- You are close to meeting your financial goals
When you are about to meet your financial goals, you should look at withdrawing your funds from equity mutual fund investments. That’s because the shorter the time you have to meet your goal, the less risk you can take. So, you want to safeguard your corpus and move it to a debt fund or a bank fixed deposit depending on how long you have left for your goal. Ideally, you should look at withdrawing your mutual fund investments from equity funds that you had invested in for long-term goals when you are one to three years away from your goal.
- There is a change in fund fundamentals and mandates
Every mutual fund investment comes with a specific objective, risk level, asset allocation, and fund manager based on which investors make the decision to invest in it. However, there can be instances when such fundamentals go through a change, in which case you should consider reviewing your investment. For instance, if a debt mutual fund takes on more risk than is mandated by investing in debt securities with high credit risk, you should look at switching to another fund that aligns with your risk tolerance and rebalance your investment portfolio.
- The fund is consistently underperforming
When you invest in mutual funds, it’s essential to keep track of and calculate mutual fund returns to know whether the fund is underperforming. Generally, if a fund has delivered returns of 5% to 6% for a period of two to three years, it may be underperforming. This, of course, also depends on the overall market performance during that period. Hence, a good litmus test is looking at the performance of the mutual fund’s benchmark and seeing how it has been performing in comparison to that.
- There is an overlapping of securities
There may be a situation where you realise that you have invested in multiple mutual funds that have a high number of overlapping securities. For instance, if you end up investing in two large-cap equity funds, chances are that a lot of the underlying stocks in these funds would be the same. Hence, you should, at that point, consider exiting from one of those funds and look at different types of mutual funds that can help optimise your portfolio returns while adding diversification.
This is why it’s crucial to regularly track the performance of your mutual fund investments and keep up with any updates and changes. At the same time, having a clear idea of your financial goals and risk appetite ensures that you make the necessary moves when required so that your investments are always aligned with your needs.