My dad smiled and gave him the usual polite nod. They chatted a bit, mostly about cricket, business financing, and the typical family gossip, and then moved on.
Later that night, when we got home, I asked him, “Pappa, tame su jawab aapyu? (What did you answer?)“
He looked at me, paused, and then said in his calm, typical Gujju businessman style, “Beta, paisa lagavvu easy che, pan paisa kem kadho, ena mate buddhi joiye. (Putting money is easy, but knowing how and when to take it out requires wisdom.)”
Then he added, “People look at last year’s returns like they look at mango sweetness. Sweet hoy to badha lai lese (if it’s sweet, everyone wants it). But market ma meetho time kharekhar sambhalvu joie. (But when it’s sweet, that’s exactly when you need to be careful in the market.)”
In that one line, my father captured what many investors miss. It is not just about chasing what looks sweet today, in terms of returns. It is more about having the sense to protect yourself when that sweetness turns.
That is what I want you to understand as well.
Point # 1: Exit to stick to your planned asset allocation
Earlier, I thought I could simply “feel” when to exit. I would hold on as long as funds kept going up, hoping to catch the very top. But hope is not a plan, as I saw painfully in 2018 and again in 2022.
For example, after the 2017 rally, smallcap funds delivered 50 to 60% returns in a year. Many investors’ smallcap allocations grew from 20% to 35% or even 40% of their equity portfolios. Most of them didn’t trim because the euphoria was strong.
When 2018 came, the Nifty Smallcap 100 fell ~29%, and all those extra gains vanished.
Today, I track my allocation religiously. If my target small and midcap allocation is 20%, and a rally pushes it to 30 to 35%, I start trimming. I don’t try to guess if there’s “one last rally” left.
Key data point: Between January 2018 and December 2018, smallcap funds saw NAV drops of 20 to 30%. It took most investors more than 3 years to get back to 2017 peak NAVs if they held on blindly.
Point # 2: Exit when Valuation and Fund Size (AUM) signal red
Most investors focus only on valuations, like P/E ratios. But I’ve realized that for midcap and smallcap funds, AUM size matters just as much.
For example, in 2021, the Nifty Smallcap index P/E went above 70, while historical averages were around 40 to 50. At the same time, popular funds like SBI Small Cap and Nippon India Small Cap grew rapidly to ₹15,000 to ₹20,000 crore.
When valuations are high and fund size is bloated, it becomes harder for fund managers to find quality small stocks and deploy new money efficiently. They may end up parking cash or taking positions in larger, less interesting stocks, which dilutes future returns.
I learned to watch both together:
- If valuation is high + AUM is large, it’s time to trim.
- If valuation is reasonable but AUM is small, there might still be room to stay invested.
This double-check has helped me avoid getting stuck when everyone else is still cheering big returns.
Point # 3: Exit when portfolio quality changes
One of the most practical yet overlooked exit signals is when a fund starts changing its portfolio quality to accommodate excess money.
When smallcap and midcap funds grow too big, managers often move from pure small stocks to larger midcaps or even borderline largecaps. Or they increase cash holdings quietly.
For example, some smallcap funds started adding higher allocations to top-200 stocks or cash holdings above 10% in 2021 and 2022. These adjustments suggest that managers are struggling to find enough good opportunities.
I started checking fund fact sheets and quarterly disclosures more closely. When I see sudden shifts in portfolio allocation or quality, that tells me it might be time to trim, even if NAV is still rising.
Point # 4: Exit, even if you need to pay tax
One of the biggest mistakes I made was refusing to sell because I did not want to pay long-term capital gains (LTCG) tax. I used to think, “Why give away 10% of my gains to the government?”
But by holding on, I watched my gains evaporate. Meanwhile, those who booked profits and paid tax still ended up better off, while I kept waiting for a rebound that took years to come.
Now, I see tax as the price for protecting capital and not as a loss.
For example:
- If my smallcap fund has grown by 60% and I trim ₹5 lakh, even after paying 12.5% LTCG tax (₹39,062), I still lock in ₹4.6 lakh.
- If markets correct by 25%, I would lose ₹1.25 lakh on that ₹5 lakh, much higher than any tax I might have paid.
Key data point: During the 2022 correction, many smallcap funds fell 20 to 30%. Investors who refused to exit because of tax fears ended up losing far more than they would have paid in taxes.
This is why, if any of the earlier signals – high valuations plus big fund size, asset allocation, or changes in portfolio quality, show up, I do not hesitate to exit, even if it means paying tax.
In the end, it is better to pay a small tax and keep your hard-earned gains safe than watch them disappear on paper.
Why This Matters and My Final Take
I have noticed most people (including my old self) spend all their energy on picking which fund to buy but never think about when or how to get out.
In midcap and smallcap funds, this is even more important. These funds can fall 30 to 50% in a matter of months and then take years to come back up. By the time you realize it, you’re stuck with watching your profits disappear and wondering what went wrong.
That’s why keeping an eye on things like valuations plus fund size, inflow trends, and changes in portfolio quality has helped me a lot. These signs are not meant to scare you into selling everything suddenly. They are there to tell you, “Boss, it’s time to slow down and maybe take some money off the table.”
At the end of the day, it is not about having the highest returns on paper as it is about making sure you can use that money when you need it without tension or sleepless nights.
Simple Key Takeaways for Any Investor
- High valuations + large fund size? That’s a strong signal to think about reducing.
- Fund suddenly holding cash or big stocks? The manager may be struggling to find good opportunities.
- Exposure has grown too big? Cut back gradually. Don’t wait for a perfect number.
- Tax fear holding you back? A small tax is better than watching your gains disappear completely.
Author Note
Note: This article relies on data from fund reports, index history, and public disclosures. We have used our own assumptions for analysis and illustrations.
Parth Parikh has over a decade of experience in finance and research. He currently heads growth and content strategy at Finsire, where he works on investor education initiatives and products like Loan Against Mutual Funds (LAMF) and financial data solutions for banks and fintechs.
Disclaimer: The purpose of this article is to share insights, data points, and thought-provoking perspectives on investing. It is not investment advice. If you wish to act on any investment idea, you are strongly advised to consult a qualified advisor. This article is strictly for educational purposes. The views expressed are personal and do not reflect those of my current or past employers.