You surely do believe that your SIP is a long term investment towards your long term goals and hence it should not be disturbed. However, that is not wrought in gold and hence you need to be flexible about SIP. There could be genuine reasons for you to exit your SIP. When to exit SIP and what could be the justification for the same? What could be a mutual funds exit strategy for you? Do remember that there is exit load on SIP if you close it before the stipulated time period. Let us look at some of the reasons for terminating your SIP.
1. Consistent underperformance is not a good sign
You started out with the equity SIP with the hope of tagging it to your long term goals. Now SIPs on equity are a long term investment and cannot be evaluated on a very short term basis. SIPs tend to give healthy positive returns over longer time frames of 8-10 years but there is a way to identify potential underperformance. For a period of 2 years, keep evaluating your SIP each quarter on 3-year rolling returns and compare with the index and with the peer group. Some volatility in performance is understandable. But if the SIP is consistently underperforming the index and the peer group, then there is something wrong. It is time to exit that particular SIP and look at alternatives.
2. Changes in interest rates or other macros
Normally, shifts in certain macros indicate a long term shift in fund performance. For example, if the inflation is consistently going to be high then equity funds may tend to underperform. Similarly, if you are doing a SIP on debt funds with long maturities then they are not good funds to hold when the interest rates are on a rising trajectory. If you expect weakness in the INR or if you expect a slowdown in GDP growth, then these are genuine macro concerns and make the case for you to terminate your SIP.
3. The goal to which your SIP was tagged is achieved
This is nothing to do with negative performance or negative macros. You may have started a SIP 3 years back to pay for your home loan margin or you could have started a SIP 10 years back to pay for your son’s college education. When a SIP is tagged to a particular goal milestone and the purpose of the SIP has been met, it is always best to terminate the SIP and use funds for the purpose designated for. You can then take an independent call on whether to replenish the SIP or not.
4. You are not on target to meet your goals
This is again a genuine mismatch between your SIP and your ultimate goal. For example, your goal may still be far away but your annual review shows that you are falling short of your goal. This could be either due to underperformance of equities as an asset class or due to underperformance of the SIP. Alternatively, your goals may have become more expensive either due to inflation or external factors. Either ways, this is a genuine case to reconsider your SIP and make alternate arrangements.
5. Fund level changes are making you uncomfortable
This is quite a common problem. For example, the fund manager who was doing a wonderful job for the last 10 years may have moved on. Occasionally, the AMC gets sold to a new fund manager and you may be uncomfortable with the strategies of the fund. There are also occasions when the fund may have made some changes to the objectives of the fund or its asset mix which may be incongruent with your goals. These are again genuine cases for you to terminate your SIP.
6. The fund is all over the media for the wrong reasons
Let us start with a caveat here! Not everything that appears on the media or the social media needs to be entirely believed. They must be taken with a pinch of salt. But when you see consistent negative cues like SEBI investigations, penalties imposed, customer dissatisfaction, services issues, allegations of circular trading etc, there is obvious room for worry. Random media reports are understandable. But there is rarely a smoke without fire. So, if you find the press and the social media inundated with negative reports about your fund, then it is time to consider an exit. They may or may not be true but why taking a chance?
7. OK, it is just that it is rebalancing time
You can terminate your SIP if the rebalancing gives you reason to do so. For example, your equity funds may have given annualized returns of 30% as against 14% targeted by you. That is a fit case for moving some of the profits into a debt fund or liquid fund. Also, if your goal based milestones are fast approaching you can start terminating some of your equity SIPs and move them into debt funds or liquid funds to reduce volatility risk ahead of your goals. This is pure rebalancing and is a fit case for moving out of SIPs.
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