Informed investors can find plenty of information in the public domain that can help them make informed investment decisions when it comes to mutual fund investments. However, one of the biggest challenges faced by investors is deciding what fund shall they choose, their risk-taking capacity, the investment duration, and more. Though all these questions can be answered if you adopt a well-draft and executed financial plan, one challenge still arises among the investors – when should they exit the mutual fund scheme? Usually, investors try to time the markets by selling their investments with the hope to reinvest at lower prices, and when they are unable to time it, it creates chaos and panic, which might lead to a loss of wealth. Understanding when to exit from your mutual fund investment is an essential aspect of your investment process as it can make or break your mutual fund investment portfolio.
When is a good time to exit the mutual fund scheme?
Here are a few points that an investor shall keep in his mind before considering exiting their mutual fund schemes:
1. Close to your financial goals? Try opting for a less risky investment option.
Whenever you are close to reaching your financial goals, you should first think of securing the capital accumulated by you until now. It would help if you did this because now your ability to take risks reduces. If your financial goals are achieved beforehand, you can choose to withdraw and shift the funds to either a fixed deposit in a bank or to a liquid fund. Either way, when you are one or two years away from your goal, you should move to a less risky investment option to make your equity component negligible.
2. Do you wish to earn regular income from your mutual fund investments and, at the same time, preserve your money? Opt for systematic withdrawal plans (SWP)
SWP is a highly tax-efficient way. It is most efficient to opt for an SWP plan rather than the dividend option. Choosing the SWP method helps you retrieve your investments in a phased manner. Then, you can transfer your mutual fund’s investment to your savings account.
3. Review and rebalance your investment portfolio regularly
The risk profile changes when your funds change. There can be many reasons for it happening, like, a change in the fund manager, a change in the fundamental attributes (structure, investment pattern, etc.) of the fund, or a change due to regulatory norms (SEBI changing criteria).
It would help if you had a prepared mindset, for such changes could occur and impact your investment portfolio anytime.
4. Is your mutual fund scheme consistently underperforming? You might consider switching to a new mutual fund scheme
Past performance shouldn’t be the only criteria for choosing a suitable mutual fund scheme for your investment portfolio. Instead, you might consider checking the system’s returns across different periods to understand how the fund is performing across market cycles. However, if your system is constantly underperforming for an extended period, you might consider switching to another mutual fund scheme aligned with your investment portfolio. You might also compare the returns of your strategy against the other funds belonging to the same mutual fund category or underlying benchmark, which will give you a better picture of the performance of your system.