Know what you shouldn't do when wanting to exit MF

The decision to invest in any mutual fund goes through several stages of analysis. Whether taking the help of an expert or doing it yourself, ideally the first step would be to define your financial goals and time horizon, then determine your risk tolerance before deciding on an asset allocation that works for you. Once you cross these levels, parameters like the funds' long-term performance, the fund managers' performance, vision and philosophy of the management, process, risk-reward ratios, etc, are taken into consideration.

Similarly, when you decide to exit a mutual fund, a number of factors need to be considered. Understanding what not to do is more important than taking hasty decisions. For instance, the lure of jumping onto a better performing fund could prove to be more harmful than wise. Unfavourable market conditions may cause a dip in the mutual fund's performance, leading you to panic and hastily selling the fund units. Emotional decisions such as this should be avoided at all costs. Acting on baseless tips on the market performance and timing the market should be ignored, too. Incessantly worrying about the market conditions and obsessively tracking your returns keeps you in a constant state of panic, which leads to rash investment behaviour. Periodic portfolio reviews would help take stock of the performance of your investments and take any corrective actions, if required. The truth remains that investors who stay clear of all the noise and focus on meeting their financial goals are not only able to achieve their goals but also earn good returns in the long run.

If you are considering exiting a mutual fund, then do so for any of the following reasons only.

Liquidate to fund a goal: You can redeem your investments if it needs to be reinvested for some other longer-term goal. On the other hand, if you want to provide for upcoming goals, plan to redeem your money from your equity investments at least six to twelve months prior to when you need it. Move the money to a fixed deposit account or a floating rate fund.

Your financial goal has been met: Once the financial goal you set out to achieve has been met, you can opt to exit the mutual fund scheme. However, before you do so, revisit your goals and assess if the mutual fund can or cannot help you meet the new goals. Explore other investment options available to you and make the decision to exit the fund at the most opportune time. Liquidate your schemes only if it is required for your intended goal and not for profit booking.

For a personal emergency: At the time of an emergency, liquidating bonds, PPF and post office instruments might not be an option due to the lock-in period. In the hour of need, you will need to access money that has been saved in your contingency fund. In the absence of a contingency fund, or any other alternatives, redeem your investments in consultation with your planner.

The investment has gone South: When a fund continuously underperforms the benchmark index, consult your financial planner regarding your options. Typically, give the fund manager one to one-and-a-half years before you decide to sell, especially when he has a track record of delivering risk-adjusted returns. Establish the reason for the underperformance – Is the fund heavily concentrated in a few sectors? Has the fund management changed? Sometimes, when the fund is performing well, there is a lot of inflow of money which you might term as underperformance; it might just be excess cash in the portfolio. However, if certain attributes of the scheme do not suit you, work with your financial planner to exit the fund.

MF's objectives and yours no longer align: Fundamental attributes of a fund may change during the course of time, such as mergers to increase profitability. If the diversity of your investment gets compromised and the fund's risk level gets altered in the process, you should consider exiting the fund.

It is imperative to work with your financial planner when you are deliberating your investment in a mutual fund. The prudent route is to adopt a holistic view of your financial requirements rather than thinking of it as a standalone mutual fund investment decision. Haste truly does make waste in this scenario, so be calm and act wisely. Happy Investing!

The writer is the founder of Happyness Factory