Investors believe that once they have purchased a mutual fund, they just need to stay invested and wealth creation would happen on its own. Unfortunately, not all funds are meant to stay as a lifetime investment. Periodically, you have to review the performance of your fund and decide whether or not it is going well. And while every bit of news should not get you worked up, here are some situations where you need to consider exiting a fund.
If your fund has been underperforming for long or is even worse than its benchmark; it is a red flag that you cannot ignore. But just because a fund has been underperforming in the short term, does not mean that you should exit it. Even good funds that have outperformed for decades have faced temporary setbacks in the past; in which case, you should stay invested and wait for recovery.
Overlap in holding
If you have two funds that have a significant overlap in their stock holdings, you might want to sell one of them; since here, you are not getting the optimum level of diversification. Additionally, if you have too many funds in your portfolio, you might want to sell some. Around five well-picked funds will help to achieve diversification in your portfolio. Anything more than that, and the complexity of your portfolio will increase without giving you any benefit.
A change in the fund manager
Irrespective of what fund houses say about their process-driven approach, and how they render a change in the fund manager as inconsequential to the fund’s performance, the truth is that fund managers do have a decisive impact on the performance of the fund. Thus, if the fund manager changes, keep a close watch on the fund.
A change in mandate
If a fund changes its market cap orientation or its investment style; you might want to exit it. For instance, if you had invested in a multi-cap fund which is operating as a mid-cap fund, you should quit it because obviously, you had not signed up for added risks. Similarly, if a debt fund changes its fundamental attributes, and invests more in lower-rated securities, you might have to exit it.
A change in ownership
The investment culture of fund houses is reflected in their stock picks. Thus, if a fund house is acquired by another, the investment philosophy will also likely be impacted. And if this happens, be on the lookout for any significant developments in the way your fund is being managed.
You might want to liquidate your investments if the goal for which you invested in the mutual fund is close at hand. Or else, you can transfer the corpus to a debt fund from the equity. Ideally, consider using a systematic withdrawal plan or a systematic transfer plan to exit the fund. This protects from market downturns.
If you believe that you want to exit a fund due to any of the above reasons, do so by all means. However, made sure that there is evidence that justifies this decision. But whatever you do, make sure that you do not make a hasty decision because of short terms gains. Equity funds can grow your money by multiple times if you hold them for the long term.
Selling too early means that you would miss out on these gains, and also disrupt your goal planning.