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Do you have a strategy to exit from investments in mutual funds?

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Most of us can easily determine when to invest, where to invest and how to invest, but many fail to understand when to exit from our investments. While everyone talks about the right time to invest, let’s focus on when to exit from investments, as this is one of the most important strategies to have.

We usually get impulsive with our investment decisions. For example, we think it’s the best idea to withdraw our investments each time we see a gain or loss. However, that’s not the advisable strategy. Most of us invest to achieve a certain goal. Its always recommended knowing what your goal is. The goal could be anything, to purchase a car, a house or go on a vacation with the family. Along with your goal, having an exit strategy is always helpful.

Have a disinvestment plan

Its always said that the longer you stay invested in a mutual fund, the better are the returns. Though this statement seems to be very much true, its always good to have a disinvestment plan. For instance, a SIP made since January 1st, 2013, would have earned you higher returns when withdrawn in January 2018, rather than holding until December 2018.

From the above graphs, you can see that holding the investment a little longer would affect your returns. At first glance, you may feel nothing was wrong and think that markets are volatile. But with a closer look, it proves the lack of exit strategy.

When you know you are closer to achieving your goal or would need to withdraw your investments soon, you should have a plan to systematically exit the investments. Ideally, to safeguard your wealth, start accumulating one year prior to the actual date from when you need the capital. From about 9-12 month prior to your need for the money, is the right time to start withdrawing your investments. However, do not do it in one shot, follow a systematic strategy for this as well, like Systematic Withdrawal Plan (SWP) or Systematic Transfer Plan (STP). This way you’ll be able to transfer your investments to a safer or less volatile fund, such as a debt fund. So the basic principle is that moving money to a less volatile investment instrument one year prior to the need.

Know when to exit from investments in mutual funds

Sometime even during your goal period, there might be instances demanding you to exit from investments. In such scenarios, exiting the investment is suggested only when:

  • There is an emergency: In case of financial emergencies, when your emergency fund isn’t sufficient to meet your requirement, you need to consider exiting your mutual fund investments.
  • Change in fund manager: Fund managers experience and expertise are considered before investing in a fund. The major part of the fund’s performance depends on how well the manager is able to manage the funds in extreme situations. Hence, a change in fund manager can have a great impact on the fund’s performance. As long as there is no change in the fund’s investment objective, there is no need to worry. However, keep an eye on his performance to see if his investment decisions are churning good returns.
  • Change in fund’s strategy: Investors invest in funds only if their investment objective is aligned with the fund’s investment objective. Therefore, any change in the fund’s strategy signals as reconsidering your investment in the fund.
  • The underperformance of the fund: Mutual Funds are market-linked instruments and hence are subject to volatility. Any movement in the stock market would also affect mutual fund performance. Short-term fluctuations in the market may be misleading. And, it is not a good idea to base your decision on this. Consistent underperformance for over and above 18 months is a good indicator to consider disinvesting from the fund to cut further losses.
  • Need for rebalancing your portfolio: To have your investments aligned with your risk appetite and financial goals is very important. Timely review of your investment portfolio is required to maintain a balanced between your investment mix and the fund.

If not for the above reasons, holding your investments for longer durations is always suggested. Along with an investment plan, always have an exit strategy ready for your investments. It’s difficult to hit the bullseye when it comes to entering or exiting the market at the right time, but having a plan will always come for your rescue.

Conclusion

Withdrawing from a mutual fund should be well-thought off. Investing towards achieving a certain goal is the most common among investors today.

When you know you have made enough towards achieving the goal, do not be in greed and expect to earn more money through the investment and prolong your exit. When you know you have earned enough to achieve your goal, withdraw your investments.

Volatility can burn out your wealth and leave you with lesser amounts. Finally, have a planned exit strategy for your investments. Make sure you start withdrawing systematically by transferring your investments into less volatile and risky instruments at least one year prior to your goal achievement.

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