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7 mins read . 27 Jan 2023
It is said that “Almost anybody can enter a good stock at the right time, but only the smart investors can exit at the right time.” This not only applies to equities but also to mutual funds. As much as mutual funds are long-term investments, there could be a set of circumstances that impel investors to exit their mutual fund holdings. These factors could either be internal or they could be external to the fund. The moral of the story is that when one of these conditions arises, then what matters is that you rethink your ownership of the fund. Here are some unique situations when it is justified to exit mutual fund holdings, even if you are holding it as part of your long-term portfolio
What do we mean by underperformance here? Every fund may have one or two bad quarters and that is perfectly fine. The problem is when this becomes a habit. That is where there are two aspects to look at. Firstly, focus on at least 5-year returns. Secondly, look at these returns on a rolling basis. That means calculating 5-year returns on a rolling basis each quarter. If you still find bad performance for more than 3 quarters, it is time to rethink your holdings in that fund. After all 4 bad quarters cannot be a chance. It is just a bad choice of stocks and bonds that is affecting performance. There could be reasons like exposure to the wrong sectors, bad timing, too much risk, low-quality debt etc. It is best to exit such funds.
When do decisions made by your fund actually perturb you? There could be several instances. For instance, your fund may have decided to change its objectives of the fund. A large-cap fund may have been converted into a mid-cap fund or multi-cap fund. Alternatively, sectoral definitions may have been broadened. The fund manager's outlook on market levels and interest rates might have been consistently wrong or the fund may have been on too much of cash for too long. Above all, the pace and intensity of the portfolio churning may be making you uncomfortable. You can always seek clarifications from the fund, but if responses are not satisfactory, it is best to exit the fund.
These are not to do with the fund or the fund manager but are more external. You may feel that some of the recent decisions of your fund manager may not be in sync with the shifting macros. For instance, the RBI may be leaning towards raising interest rates but the fund manager may still be adding on to long-maturity debt in the portfolio. Alternatively, your fund may still be heavily invested in capital goods, when the capital cycle is turning. Such overexposure can be a reason for marking your exit.
This is specific to your individual goals and when these goals are achieved, staying invested in that fund does not add much value. For instance, you may have invested to meet the margin money payment for your home purchase. When the call comes, it is best to exit that fund and pay the margin money. You may have invested in a mutual fund SIP for your child’s education and time for paying the first instalment of the fee may be up in front of you. These are all cases wherein you can just liquidate your mutual fund and meet the goal.
You don’t rebalance your portfolio regularly; you only review it annually. However, there could be genuine reasons to rebalance your portfolio. For instance, you have turned 50 and there is a need to cut your equity exposure. Market macros may be favouring the multi-cap approach over the large-cap approach. Fund NAVs may have gone up sharply after a bull run and your allocations may have diverged from the original plan. When you rebalance your portfolio, you sell some funds and buy fresh funds in sync with your allocation and goals.
Not all media coverage is objective and reliable, hence you must address it with a pinch of salt. However, consistently negative media coverage is never good for any fund and as they say, there is never smoke without fire. If the fund you are invested in faces a run of redemptions, or if there are consistent negative stories about the performance and asset quality of the fund; it is time to be careful. Be cautious if there are repeated cases of SEBI investigations and observations about fund manager actions and corporate governance. Most of these allegations may be hard to verify, but when in doubt, think with your feet!