Enjoyed a bull ride in the market? Worried that the recent meltdown will wipe your profits? Well, it’s okay to have a temptation to sell your mutual fund holdings. But to secure your financial goals, you ought to undertake intelligent decisions. So read on!
Understanding the Market Cycles
As an investor, you might often get confused with the timing of selling your mutual fund. A hasty decision might lead to reinvestment risk and related transactional costs while you miss out on the opportunity to gain extra returns on your investment.
The Importance of Timing in Mutual Fund Investments
So when it's almost impossible to gauge the market direction accurately, should you consider Selling your mutual fund this year?
Reasons Not to Sell During Market Highs
Well, there are many reasons to sell your investments, but just because 'Markets are at a Lifetime High and you're tempted to book your profits' it isn’t one of them.
Stock Market Cycles
Understanding Stock Market Cycles is key to generating Maximum Returns from stock markets or, in this case, Mutual Fund Investments. Over the long term, stock markets tend to generate higher investment returns because the market has passed through all four market cycle phases.
Understanding Stock Market Cycles
To make it simple, a stock market passes through four phases where stocks tend to go up, peak, come down, and form a bottom. The problem with common investors is that they either fail to recognize the market's cyclical nature or must remember that every bad market phase ends. The fear during a meltdown leads them to book losses and exit from their investments.
The Four Phases of Stock Market Cycles
- Accumulation Phase
- Markup Phase
- Distribution Phase
- Decline Phase
Why Staying Invested Is Crucial
To generate maximum returns, an investor needs to stay invested during all four market cycle phases and for as long as possible. They can also make additional investments during a downturn in the stock market. This practice helps them reduce their average cost to benefit from the bullish trend in the next market cycle.
Strategies for Mutual Fund Investments
Now that we understand the different market phases, let's see how we can strategize our investments and when to exit investments.
Top Reasons to Sell Mutual Fund Investments
- To Meet Financial Goals
Everyone makes investments to secure their future. The goal and timing might differ. Say you've made investments to secure a better education for your child, whereas some other investor makes Investments to Buy a House down the line.
The ideal time to Sell your Mutual Fund units is on the eve of your Financial Goals. If you achieve your target a year or two earlier, feel free to book profits since a sudden shock might upset your Financial Goals.
You can Switch your Investments to Debt Funds or Fixed-Return Instruments for the given period. But waiting to sell your investments till the last minute can be dangerous. Set a corpus you want to achieve in 'x' several years, and once you hit your target, redeem your investments, or you might be in for a rude shock.
- Changes in the Fundamental Attributes of Your Mutual Fund
The structure, investment pattern, mutual fund manager, etc., are important parameters that you consider when starting an investment in a specific mutual fund. A merger of different schemes or takeover of an AMC can lead to changes in such Fundamental Attributes.
The recent categorization and rationalization of mutual fund schemes that SEBI took up is the best example. Many Mutual Fund Schemes were amalgamated, and many investors saw changes in the basic attributes of their schemes.
If such changes are outside your investment style, you should exit the fund even if it's outperforming. Find a new scheme best suits your risk appetite and switch funds.
- Continuous Underperformance
Well, you should give some time to your investments. But remember that you're here to make money, not give chances. If you find yourself invested in a fund that has continuously underperformed the category average returns for 2-3 years, it's time to switch your fund scheme.
In case you're wondering how to measure underperformance, you ought to compare the actual returns of your fund with the benchmark index and with your fund's peers. That will give you a true picture of your portfolio. Even when the Markets Outperform, a certain sector in which you're invested is passing through a rough phase.
Only take decisions based on the average returns of the relevant benchmark index. If you find the reasons for underperformance genuine enough, you can continue your investments since it's, not your fund but the sector that's in bad shape.
- Rejig in Your Portfolio
At times, after a periodic review of your investments, you might find the need to Rebalance your Portfolio. For instance, if your investments are skewed towards a particular asset, say Small-caps and Mid-caps, during a bull run, it becomes imperative that you exit such investments right in time, or you run the risk of losing your gains in the short term.
You find the need to rebalance your portfolio to your original allocation plan. In such cases, you should exit the relevant investments and switch your funds as per your needs.
The Power of Compounding
In the end, it's only time that generates higher returns. However, investors are frequently concerned about 'timing the market' and that's where they need help understanding the Power of Compounding.
It's imperative to liquidate your investments during emergencies. In other cases, always remember that the longer you stay invested, the better. But be sure to make smart decisions and not hasty ones.
Expert Advisory from 5nance
At 5nance, we provide customized Mutual Fund Advisory. So you can rest assured with an expert’s decisions that’s backing you up. So log into 5nance.com and start your journey towards a better future today!
FAQs
When is the best time to sell mutual fund investments?
The best time to sell is usually when you have reached your financial goals or if there are significant changes in the fundamental attributes of your mutual fund.
What should I do if my mutual fund is underperforming?
If your mutual fund has been underperforming for 2-3 years compared to the category average returns, consider switching to a different fund.
How do market cycles affect mutual fund investments?
Market cycles can affect the performance of mutual funds. Staying invested through all market cycles can help you maximize returns.
Should I sell my mutual funds during a market high?
Selling solely because the market is at a high is not advisable. Evaluate your financial goals and the fundamental attributes of your fund before making a decision.
What is portfolio rebalancing and why is it important?
Portfolio Rebalancing involves adjusting your investments to maintain your desired Asset Allocation. It helps in managing risk and aligning your investments with your Financial Goals.
Can I switch mutual funds if the fund manager changes?
Yes, if the new fund manager's strategy doesn't align with your investment goals, you might consider switching to another fund.
