Planning Your Mutual Fund Exit Strategy: 5 Situations When You Should Consider Exiting

While most investors know the importance of mutual fund investment in building a corpus for various life goals, it is equally essential to know when to exit. Mutual fund exit strategy shouldn’t be in haste but a planned move to ensure your larger goals remain intact. There are multiple situations when you should contemplate mutual fund withdrawal or exit. What are these? Let’s find out.

5 Circumstances That Call For Mutual Fund Exit

It is prudent to exit your mutual fund investments during these situations:

1. Upon Reaching Your Goal

Every investment, including mutual funds, is made with a goal in mind. Whether you’ve invested in building emergency funds, saving for your child’s higher education, or your retirement, if you’ve achieved your desired goal or are close to achieving it, you can consider mutual fund withdrawals.

For long-term goals, like children’s education or retirement, where investment is generally made in equity funds, it’s wise to exit a couple of years before and deploy the proceeds in relatively safer instruments like debt funds or fixed deposits.

2. Underperformance For A Long Period

Chronic underperformance for a long period calls for mutual fund exit. If your fund has underperformed its benchmark index or peers for a considerable period, you can consider redeeming and investing in a better performing fund. A fund can underperform because of several reasons. It could be due to the existing economic climate, government policies or calls taken by the fund manager.

While there’s little you can do about the first two, if a fund underperforms for a long period due to the fund manager’s decisions, it’s better to exit.

3. Change In The Fund’s Objectives And Risk

If a fund’s core objective changes with time and the associated risk changes, you can take the exit route. When SEBI rejigged mutual funds in 2018, several funds were merged to fall in line with the regulator’s diktat.

This resulted in changes to the fundamental structure, objectives, and risks associated with certain funds. You can redeem your investments if you feel that your fund’s objectives and risks no longer match yours.

4. Portfolio Needs Rebalancing

There are chances that the current market rally has changed your asset mix. With markets firing all cylinders, your equity mix might have increased more than your comfort levels.

In such cases, you might need to rebalance your portfolio and to get back the original asset mix might need to sell some portion of your equity funds and invest the proceeds in debt funds. To do so, you can consider withdrawals in equity funds and deploy the proceeds in debt funds.

5. Change Of Fund Manager

A mutual fund’s performance largely depends on the decisions undertaken by a fund manager. When a fund manager has managed a fund for a long period, he is well aware of the fund house’s investment style.

However, when a new manager is at the helm, it can take some time for him to be acquitted with the AMC’s investment style. Also, a new manager often brings his own ideas that may or may not fit into the fund’s objectives. In case you find the new manager’s decisions do not justify the fund’s objectives, you can take the exit route.

In Conclusion

When you plan a mutual fund exit strategy, be mindful of the exit load (if any) and capital gains tax that may arise. Plan your exit meticulously and avoid rushing through the decision.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.