One needs to make an exception if there is a fundamental change in the attribute of any fund, which may require selling the fund earlier than planned.
While investing in mutual funds, there are various things one needs to figure out — starting from where to invest to when to sell which fund. Based on the ‘buy low, sell high’ strategy, many investors wait for the market to fall to buy low and sell the units when the market is high, but it’s easier said than done.
Investors, therefore, need to follow the right approach while selling units or exiting from mutual fund investments to get the maximum benefit.
The right approach for selling or exiting from mutual fund investments
Investments linked to Financial Goal: It is always recommended to buy mutual funds with a clear financial goal in mind and the right asset allocation. Anurag Garg, CEO and Founder, Nivesh, says, “One needs to buy the right funds, considering multiple objective parameters within each asset class. If the selection of funds has been done with this process, then the investor needs to hold on to the investments till the financial goal is achieved and not take an impulsive decision to sell due to some temporary shift in external market conditions.”
Having said that, one needs to make an exception if there is a fundamental change in the attribute of any fund, which may require selling the fund earlier than planned.
Change in External Market Situation: There are many external market factors that require investors to restructure their portfolios. For example, Garg adds, “if interest rates are rising, then it is prudent to shift the longer maturity debt funds (like Gilt Funds) to shorter maturity debt funds, and vice versa.”
A shift in Fundamental Attribute of Fund: There could be a fundamental shift in the attributes of the fund, which could require selling the units of the fund. The shift in the attribute may lead to altering the basic reason for which the investment was made in the fund.
For instance, Garg adds “SEBI changed the rules for investment allocation by multi-cap funds in September 2020. The rule required these funds to allocate a minimum of 25 per cent to large, mid and small-cap stocks. This took away the flexibility such funds enjoyed. It then led to the creation of a new category of Flexi cap funds. An event like this is a fundamental change in the attribute of the fund, and may require an investor to sell the units and shift the corpus to another fund whose attributes match with the requirements of the investor.”
Underperformance compared to peers: If a fund is underperforming peers and such underperformance can be attributed to the strategy being adopted by the fund manager, then experts say the investor can take calls to shift to better-performing peers. For all exit decisions, investors also need to consider the implications of exit load and taxation before taking the final decision.