It is essential for an investor to have long term investment plans. Only then, one can earn more income beyond the rate of inflation and pay less income tax during mutual fund redemption.
At the same time, it is necessary for you to constantly check whether the mutual funds invested in are helping you, the investor achieve his financial objectives and goals. There are five important signs which you should be aware of during which you can decide to sell your Mutual Funds.
Lower Returns on your Mutual Funds
Investors should invest in risky asset classes like equity for long term. Investments should wait for atleast 5 years to give good returns.However, if an equity fund has performed poorly for more than two consecutive years, you should plan to exit the fund. It is better to take this decision in one year in case of debt fund and in 18 months in case of hybrid fund.
The returns of the fund invested in different time periods like 1 year, 2 years, 3 years and 5 years should be compared with the returns given by the benchmark index of the respective fund. If the fund that one has invested in throughout the entire tenure is giving low and poor returns then it is better to sell the units of that fund and exit. Investing that money in a consistently performing fund would be profitable.
Also Read: How to Invest Money in Stock Market
Changes in Objectives of the Mutual Fund
The investment objective of the invested mutual fund is changed and the money collected by the fund is invested in company shares belonging to different risky sectors, and it sometimes happens to invest in company shares with different market capitalization. Then the change may not suit the investment objective of the investor. For example, an ESG fund invests in coal manufacturing industry.Acquisition of mutual fund company by another company, change of ownership of mutual fund company, merger with other scheme changes the risk level of mutual fund portfolio. If these changes do not meet his needs as an investor, it is better to exit the fund. This is the reason why many investors who invested in UTI Master Growth Fund sold their units when the fund became a UTI Top 100 fund.
Change in Nature of the Mutual Fund
If a particular fund has an investment objective of investing in all equity market capitalized companies, it should invest in largecap stocks, midcap stocks and smallcap stocks. But in recent times it has been heavily invested in midcap stocks, so its risk has increased a lot. This shift may not be suitable for the risk averse investor. So, it is better for him to exit that fund.Therefore, as an investor, after investing in a mutual fund scheme it is necessary to carefully consider the investment mix of funds. And when a fund changes its category, you need to keep monitoring to avoid risking your investment and incurring huge losses.
Huge Increase in Value of Investment
The value of investment can increase rapidly and reach the target valuation early. If it increases, don't be greedy and wait for more profit. If you wait like that, you may lose even the gains you have made now. So, it is wise to book profit in case of higher than expected profit. It is better to take at least the profit from the equity fund and shift it to a less risky debt fund, target maturity fund etc.You had planned to add Rs.20 lakhs for your daughter/son's higher education in eight years. Your investments at the end of six years will be Rs. 20 lakhs has increased. It is better to immediately transfer this money to safer and less risky investments. If you leave investments in the same fund, its value may decline due to subsequent stock market declines. Hence, once the mutual fund investment reaches the target value, one can protect the higher investment value by moving away from the current risky schemes and moving to safer investments.
Realignment of Investments based on Asset Allocation
Sometimes your investments have increased in value. Then, the debt fund can maintain asset allocation in the investment mix by shifting investments to hybrid funds. Also, the risk can be reduced while protecting the profit.While the return on equity investments is very high, you should realize that your investment percentage is higher in the risky equity market. This can of course be fixed with a restoration. That is, asset allocation can be maintained properly by selling a portion of overvalued equity investments and investing in undervalued debt market oriented schemes. Doing so will reduce the risk of the investment mix.
I believe this blog post gave you an idea of when to exit your Mutual Fund Investments when you are unable to take a decision on it.
