If the target set has been reached before the earmarked period, it would be prudent to move the ‘target achieved’ amount to a liquid fund. In a thematic and sectoral fund, one should exit when the theme is wavering, after the peak or at the peak itself.
It is when you sell that the gains or loss of the asset redeemed and sold is determined. Any other movements in price is only in paper and unrealised. So, when should one sell mutual fund units? The logical answer is: When there is need for money. The next question is: When do we need the money? Money is required as and when a need arrives. Can we anticipate this? In majority of the cases, barring a medical emergency or any other unforeseen circumstances, the need of money is known in advance. Does the above hold true in mutual fund investing? The answer is: It depends. One of the cardinal principles in investing is “to begin with the end in mind”. But then, this principle is followed in aberration. Time horizon of investment When you invest, be it in lumpsum or in instalments, you should know the time horizon, the asset class you are investing in and also the anticipated return during the investing period. So the rule and method is available and also easy to follow. Why then does it become difficult to execute?
That is because the return graph does not grow in a linear manner. It moves in a volatile manner which upsets the rhythm of the investor and starts doubting the process. As an investor, when you are investing based on the time horizon, selling the units is predefined in the asset class chosen. Say, you are parking your funds for short term needs, 0-6 months or even a year. It is recommended and expected that you do not wish to see capital erosion. This would mean that the investment, typically, will be in liquid mutual funds. This scheme has very little standard deviation and minimal volatility. This takes care of the dilemma—when to sell. You can sell any time between 0-12 months. Again, you need to be aware of the volatility and should not try to invest your short-term cash flow needs into a volatile asset class as this could lead to capital erosion.
As you invest for a longer time-frame and horizon, say, for over three years, the investment can be equity mutual funds. For a horizon of 3-5 years, a large-cap mutual fund can be the option. Again, here we need to be clear on when we need the liquidity. The past performance of large-cap mutual funds over a 10-year period indicates a return in excess of 14% CAGR, which means an investment of Rs 1 lakh has grown to more than Rs 4.2 lakh over the decade. So that is a good benchmark to know. Having said this, it was a very volatile period and you need to know what is your exit period. If the goal or the target set has been reached before the earmarked period, it would be prudent to move the ‘target achieved’ amount to a liquid fund, so that the volatility, in the future is not impacted on the corpus. Say you had invested Rs 5 lakh, with the target of Rs 10 lakh over a five-year period. If this target has been achieved in the fourth year, you should think of moving the amount to a liquid fund. If you are becoming too greedy, keep 10-20% and move the rest to a liquid mutual fund. This will ensure prevention of capital erosion.
If you have invested in sectoral or thematic funds, it is very important that you catch the cycle right. The pharma sector was a rage from 2009to 2014. If you had not exited at 2014, all the gains in the portfolio would have been lost in the last five years. So,in a thematic and sectoral fund, one should exit when the theme is wavering, after the peak or at the peak itself . Risk is the critical ingredient which drives the portfolio building and management process. Never ever should one compromise on this part. As shared earlier, “Do begin with the end in mind”.
The writer is founder and managing partner, BellWether Advisors LLP