Here are some strategies which guide about when you should exit a Mutual Fund to keep returns intact:
Mutual Fund investments are indeed risky propositions. But at the same time they are quite flexible compared to other investment havens. Particularly with regard to your entry and exit. It not only determines your overall take away from the investments but also the extent of goal accomplishments. It’s advised to conduct a goal-based investing and set the investment horizon accordingly. But as you know, the markets keep going up and down. Along with them fluctuates your wealth accumulation prospects.
You look at your dwindling returns and wonder what you should do. That’s quite natural. Initially, you were told to stay invested till you attain your goal. But the market volatility is not letting you sleep peacefully. You are in a constant dilemma regarding when to make an exit.
You got so many advices upon entering the mutual fund arena. But nobody told you when to redeem your investments.
Does it affect your returns?
Just like an opportune entry takes your returns to a new high; similarly, a mindless lingering may push you into doom.
The next question in your mind would be: What should I do now?
If you find your investments moving southwards, don’t stay still. Time has come to take a call.
There are many strategies out there to decide about your exit option. Instead of feeling helpless about your financial future, you may use any of these exit strategies to cut your losses.
1. Go on a roll with Rolling returns & XIRR
You may start with the most conventional way. Use some of the performance indicators to judge the fate of your investment portfolio. You may compare the Based on the historical performance of say 5-10 years; you may compare the rolling returns of your portfolio with the category returns. You may also draw a comparison between portfolio returns and the benchmark returns. Herein, you need to look the number of times your portfolio returns beat the index returns. Among the benchmark indices, you can select NIFTY. It’s quite broad-based and bit challenging to outperform. So, you come to know the consistency of your fund as compared to the index.
You may also ascertain behaviour of SIP returns. You may Click here to track SIP returns
Compare the returns with that of the category returns or the selected index. Here again, you need to look the number of times your portfolio has outperformed the index. If in most of the cases, your portfolio returns exceed the index returns, then there’s no need to exit the mutual fund. Otherwise, you need to make a move. Make sure you select the correct benchmark to compare apples with apples. It’s like choosing a midcap index to compare the performance of a mid cap mutual fund & likewise.
2. Check the quarter-to-quarter performance
Quartile rankings of the fund indicate a lot about its overall performance. The process of quartiles categorises all the mutual funds into four quartiles. Top quartile implies high performer while lower quartiles show a laggard. These rankings would help you locate the position of your fund at the top or the lower rungs. Ideally, a good and consistent performer is one which always appears in the top quartile. If you find your fund slipping to lower quartiles from one-quarter to next, then consider it as a warning.
But don’t jump to a conclusion immediately. Search for reasons behind this southward journey of your fund. Try to ascertain whether it’s a temporary phenomenon or permanent disability in the fund’s performance.
3. Downside protection and Upside potential
Suppose your portfolio consists of 3 funds wherein one is a large cap & the other two are small cap and mid cap respectively. Your aim would have been to provide a stable base along with a scope for zing in returns during bull runs. Now you notice that the small-cap fund is bleeding on account of a monetary policy change. Don’t be a hurry to weed it out from your portfolio.
Look at the bigger picture. If that fund’s going down, but your portfolio returns remain in line with your expectations. Then no need to refurbish the portfolio. Just check whether the small cap has strong fundamentals. If the answer is yes, then don’t worry. Wait for a year or so. As the economy revives, it would start blossoming once again. If the fund’s performance doesn’t pick up, simply part your ways.
Also read: Goal-based investing through mutual funds
4. Don’t be fooled by the star power
Whether it’s the latest movie or picking a mutual fund scheme, star ratings and reviews tend to influence your judgement. But don’t let stars cloud your wisdom. These usually change now and then. And it would be foolish to base your entry/exit on these. It’s because the parameters analysts use for providing star ratings may be different from your circumstances. Especially as regards your date of entry into the fund and time of SIPs. It can have a tremendous impact on the quantum of returns.
Suppose your three-star rated fund is giving you an XIRR say 20%. And it has been downgraded to two-star. So, this shouldn’t trigger an exit. Be with the fund till it remains as per your specifications.
5. Difference of opinion
It’s been rightly put that “Change is the only permanent thing in this world”. So, everyone should be ok with the changes that take place now and then. One fine day you notice that your fund has completely changed the investment mandate. It has transformed the basic structure and risk profile of the mutual fund. This change is not at all ok.
In yet another case, the previous fund manager left the fund house. Even after six to seven months of incumbency, the new manager hasn’t come up with good results. You see the external factors like the economic growth, the markets, peer funds in the category, everything is in good shape. Only your fund is getting sicker day-by-day.
Both of the above circumstances are a clear indication to move on. The moment you recognise that differences have cropped up between your philosophy and the fund strategy, it’s time to switch. Ultimately, it’s all about goal-based investing. And if a fund isn’t good enough to fulfil your goals, there’s no point in sticking around.
A mutual fund investment is entirely a game of patience. Men may come and go. Markets may rise and fall. But it should not influence your composure unnecessarily. Remember that returns aren’t going to shower from the very first day. You need to be persistent with your investment regime. But at the same time be vigilant. Keep analysing returns and investment behaviour of your fund house. The moment you find it’s not working anymore, part your ways.