HITTING THE EJECT BUTTON
Extraordinary situations when one can consider exiting a fund
Sell or hold—most mutual fund investors have faced this dilemma at some point or the other. It is, of course, generally advisable to stay put to achieve long-term goals, but under some circumstances, it becomes necessary to reassess one’s mutual fund investments.
Underperformance
This can be a serious concern if it continues for an extended period of time. Investors should remember, though, that markets go through cycles, and it is not reasonable to expect a fund manager to deliver chart-beating performance year after year. If there are instances of underperformance in the short term, do not panic sell. But if the situation continues for years, it is advisable to pull out of the fund. There is no point staying invested in a fund that underperforms year after year.
Change in outlook of the fund
If there is a change in the investment outlook of the fund or the asset management company, the kind of change that does not suit your risk appetite or your financial goals, you should consider switching to another fund. For example, an equity fund could decide to invest more in small- and mid-cap stocks. This would change the overall allocation of your funds, which may not suit your portfolio—in this example, a higher allocation to mid- and small-cap stocks will make your portfolio more volatile. However, one should first assess if the change is simply a tactical manoeuvre by the fund manager before exiting.
Change of fund manager
This is not a reason to immediately exit the fund, but you must be aware of the new manager’s investment strategy. Different managers have different investing styles and philosophies, and if the changes do not match your investment goals, you should reassess your investment.
Rebalancing your portfolio
Savvy investors pick asset classes and their exposure to those assets according to their financial goals, stage of life and risk appetite, and they tweak these allocations as one or more of these factors change. Often, this rebalancing is done to tweak allocations back to a risk level the investor is comfortable with. If you had invested, say, in both debt and equity mutual funds and if the equity markets hit a purple patch, your equity exposure might become much higher than you prefer. In that situation, you will need to sell some of your equity fund units to maintain the asset allocation at the desired level. This will protect you in case of a market crash.
If you need money
Ideally, you should have a contingency fund to meet financial emergencies. But if you do need cash urgently, you can consider selling your mutual fund. There are other options too, like a personal loan or a credit card loan, if the amount is not too high, but interest rates on these are very high.