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What are the conditions under which you must trigger exit from MFs?
05 Jan 2023

We are all aware that it is advisable to stay invested in mutual funds over the long term. This is more so in case of equity funds where the outperformance is more likely to be palpable when it is held over the longer term. By long term, we are referring to a period of 7-10 years and more. But there is a slight exception to this rule. When you are invested in a particular mutual fund, there may a variety of conditions that may impel you to exit the MF. What are these triggers that can impel you to exit your mutual fund holdings? We are not just talking about exiting a particular position altogether but also about substituting your specific fund holding in case of performance issues. Let us look at these triggers in greater detail..

When you original goal has been achieved..
Let us assume that you started an SIP in a debt fund to pay for your home loan margin at the end of 3 years. At the end of 3 years, your banker comes to you with a suggestion. He advises you against redeeming the debt funds as he expects the interest rates to go down further and that means better returns on debt funds through capital appreciation. Instead he promises to arrange a personal loan to take care of the margin money. What should you do in that case? The answer is simple. Since the debt fund SIP was originally created for the purpose of the home loan margin, it is only logical that you redeem the debt fund and pay the margin. Taking a view on interest rates and shifting your goal posts is not your job!

When the fund in question has been consistently underperforming..
Occasional underperformance is something that even the best of funds go through. You must not give too much credence to that. Good fund managers are quick to learn from their mistakes and make course correction quickly. That is what sets them apart. What about funds that are consistently underperforming? The answer is that you surely need to raise a red flag here. When a fund continues to underperform the benchmark and the peer group for 3-4 years in succession, then you can be sure that the fund has got something wrong. It could either be aggression or lack of aggression or plain poor strategy. Either ways, that is not your problem and it is best to think with your feet in such circumstances.

Where your portfolio badly requires rebalancing..
This can be very true of selected sectoral funds or about equity funds overall. Let us assume that the Nifty has gone up by 250% over the last 4 years. We did see that happening between 2004 and 2006. So your equity share of your overall portfolio that used to be 60% has now gone up to 85%. At that point of time it does not matter whether the Nifty is headed higher or lower. Your primary focus should be to reduce your equity share of the portfolio and it badly requires rebalancing. This is normally a key trigger for getting out of funds. Similarly, if equity markets are weak and debt funds are appreciating due to falling rates, then it may call for reducing the share of debt in your portfolio.
Specific changes in the particular fund make you uncomfortable..
There are various sub-sets to this argument. Firstly, the AMC where you have a fairly large holding is being taken over by another mutual fund group which you are not comfortable with. Secondly, your favourite fund manager who has consistently delivered over the last 8 years is leaving the fund and that is making your uncomfortable. Thirdly, your fund may have changed its main objective from being a diversified fund to a fund that is focused on infrastructure sector. Lastly, the fund may have decided to go down the quality curve by adding more small caps in case of equity funds and more of AA rated debt in case of debt funds. If any such development is making you uncomfortable, then it is a good enough reason for you to exit the fund.

Major macro changes are raising questions over debt or equity..
This could be true for debt or equity. Let us go back to 2007 when the sub-prime crisis first reared its head. Notwithstanding your long term goals, if you had exited your equity holdings at that point of time and even shifted to risk-less liquid funds, you would have been closer to your goals today. The same can happen to your debt funds if you are getting into a prolonged period of interest rate hikes. These are macros shifts that raise question marks over the very idea of that asset class. It could be a fit case for you to exit that asset class and park your money in a safer asset, even if it means lower returns. You will be better off in the long run!
Remember, any of the above factors can be a key trigger for you to exit your fund. We are currently living in an interconnected world where information and intelligence is passed around at the press of a button. Platforms like WhatsApp, Facebook and Twitter can create a viral impact on news. Whenever, you find a particular fund or scheme getting a lot of negative publicity on these platforms, it is time for you to sit up and do a rethink. That could be a starting point!

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