Do you also belong to the category of investors who are selling away the mutual fund investments? And if yes, are you doing so for all the right reasons?
There are multiple reasons as to why investors are selling their mutual funds. Some of them have taken this step because they no longer have any faith in the industry. This lack of trust is again due to multiple reasons. The different mishappenings in the debt mutual fund space, rating downgrades, MFs signing agreements with defaulters, defaults and the Franklin Templeton Mutual Fund shutting down six of its debt funds- all these have greatly contributed to this general lack of trust.
Investors have also been disheartened by the low single-digit returns that equity mutual fund SIPs have given in the last one, three, and five-year horizons. Investors also believe that the bleak economic situation will not improve anytime soon, because of the way things are right now. This is precisely why so many are selling their investments, and are booking whatever little they can to safeguard their capital.
Hybrid fund investors have also given up on their hybrid schemes. They have perhaps realized that they did not take the risk-reward proposition very seriously, or that they did not fully understand its implications. Several mutual fund advisors are also stating that investors have been complaining about hybrid schemes, especially aggressive ones, being as risky as pure equity schemes, without providing adequate returns or downside protection.
There has also been wide mis-selling of these schemes, which is contributing to the dissatisfaction around it. Retired people got these funds for assured dividends at regular intervals. However, these schemes stopped declaring dividends during rough market conditions, which further disappointed them. As per SEBI guidelines, mutual funds can declare dividends only out of their realized profits.
Some investors have their faith in mutual funds intact, especially those invested in safe debt mutual funds. This trend of flight to safety was evident in the data of July, which reveals that investors have put their money in short duration funds, banking and PSU funds, ultra-short duration funds, and corporate bonds. A lot of investors in equity have been fascinated by the dramatic recovery in the stock market after the pandemic was declared, and they are still betting on equity funds.
Now comes the most central part of the story. What is your reason behind selling your funds? Is it because you have been hit by economic disruptions, that the pandemic caused? Or are you facing some threats on your salary front or career? Have you been given a pink slip?
If you answered yes to any of these questions, you do have a reason to sell your investment. But before that, consider these things.
Check whether you have liquid assets that can pull you out of these times. Do you have money in your bank account to help you sail through for six months or so? If yes, do not rush and sell your investments. Even if you have exhausted all your liquid funds, try to sell your short-term investments in debt mutual funds, before selling off your long term equity mutual fund investment.
And as for the bleak economic prospects, remember that you would never be able to time your investments right. The market would have already gone up, by the time there are cues on the revival of the economy. It is important to keep investing through different phases in the market because investing only during the right conditions means that you would hardly make any money.