For long-term financial goals such as education or retirement, selling equity funds well in advance of the investment horizon would make sense.
Equity mutual fund investors have been seen trying to time the market a lot. What it means is, many investors wait for the market to fall so as to buy low and in the process gain the maximum by selling the units at a high. It’s true that ‘buy low, sell high’ is the best strategy in the world of investments but it’s easier said than done.
Stock markets are inherently volatile and it’s never an easy task to catch the bottom or the top. At times, when the market continues to make new highs and stock prices are at high valuations, there is a temptation to book profits by some investors. Nothing wrong in it, but sticking to some basic rules may help investors.
One should follow the right approach as far as selling units or exiting from mutual fund investments is concerned. “As a mutual fund investor, there is no ideal time when you should exit. The very premise that you can exit the mutual fund or there is a good time to exit the mutual fund means that you can time the market. It is not advisable to time the market. It’s better to stick to the old adage – Spend time in the market. However, sometimes there may be a genuine and real need for why one many need money from the market,” says Santosh Joseph, Founder and Managing Partner, Germinate Investor Services.
Let’s look at some of those circumstances and situations.
Are your goals nearing
If your goals are nearing, a planned exit from equity funds to less volatile liquid funds is required through a process called de-risking. “For long-term financial goals such as education or retirement, selling equity funds well in advance of the investment horizon (maybe 2-3 years) would make sense. Even if you experience a shortfall in returns of say 6-7%, liquid funds can cover up the remaining time of your overall investment horizon for said goals. Short-term goals or goals that are now nearing commitment should be directly met with liquid mutual fund investments and not left exposed to volatility in equity markets,” cautions Prateek Mehta, Co-Founder and CBO, Scripbox.
The performance of your mutual fund scheme should be reviewed at regular intervals. While some funds may outperform regularly, many actively managed funds may consistently under-perform the market or the benchmark. During the review process, if you find some of those in your portfolio, maybe its time to exit them. “In certain circumstances, selling a mutual fund may become necessary and more important than buying that same fund in the first place. This is likely to happen if there has been something fundamentally wrong with the fund performance over a period. This is a very important step and ideally should be taken with the help of a financial advisor via regular portfolio review, as timely exit from a wrong fund or timely entry into a right fund ensures efficient portfolio reallocation and restructuring,” says Mehta.
Never redeem for discretionary needs
The open ended nature of mutual funds could be a reason for many to take the exit route easily. At times, many investors sell MF units to meet discretionary expenses which should be avoided at all cost. “As far as possible, try to sell mutual funds only for needs or priority requirements instead of luxury goals, especially when you have other significant financial goals in the pipeline,” adds Mehta.
Selection of the right MF scheme suiting one’s risk profile is important. “If you feel that the decision to invest in mutual funds is not as per your expectations depending on debt or equity or if you feel the risks are too much for you, then you can consider switching your MF units to something appropriate to your risk and need profile. Even vice versa to move from debt to equity,” informs Joseph.
What to do: Add more rather than exiting
When the market falls or shows signs of weakness, many investors sell MF units and even stop SIP. Such dips and corrections may be temporary as seen in the past. For long term investors, staying invested helps rather than trying to enter back when the market reverses direction.
As an investor, using a SIP calculator, estimate how much you need to save to meet inflation-adjusted cost of your long term goals and then earmark funds towards them. Any fall in the market may be used as an opportunity to add more units. “Any short-term corrections in equity markets can always be used as an opportunity to enter, but only if you have excess cash. In such a scenario, do not dip into other financial goals such as your contingency fund, as that itself should be sufficient to fulfill your monthly expenses for a minimum of 6-9 months,” says Mehta.