With the NDA government coming back to power, investors are riding on the back of bull run that has lifted the Nifty past 12k mark while Sensex traded above 40,000 levels. However, while the market participants have hailed the election results, mutual fund investors might find it lucrative to book some profits on their Mutual Fund unit holdings! Many investors tend to time the market. When markets are soaring to lifetime highs, they often start booking profits in fear that the markets might fall soon! In other cases, a sudden fall in the markets also leads to panic selling to cut/avoid losses. But is it wise to make such a decision in a haste? Spare a few moments to understand when should you exit from a mutual fund investment!
The Modi magic has worked again! While Modi 1.0 was hugely successful, investors cheered the Modi 2.0 regime that sent the markets soaring to fresh lifetime highs.
Undoubtedly, the past couple of weeks have been cheerful for market participants. It's obvious! When your portfolio looks favorable there's no reason why you shouldn't celebrate! But, while the reality is still sinking in, you must be thinking – 'The markets have maxed out and this is the right TIME to sell my equity mutual funds.'
Well, is this the Right Time to sell?
Honestly, if you had jumped the gun only a couple months before (when markets were skeptical about Modi 2.0), you'd have lost out on almost 10%* additional returns on an average.
Since, March 2019 till the time of writing this, the markets have jumped a soaring 11.38%*. Now that has not dithered the retail investors who purchased fresh equity mutual fund units with a net inflow totaling to 4,608.74 crores in April 2018.
So while investors are riding the bull run, would you call it a right strategy to sail against the wind?
Don't Time the Market. Time Your Investments:
Selling your mutual fund units just because the Indian Indices crossed some psychological mark, but won't be able to sustain isn't the right strategy. In fact, if you were to sell your MF units only to reinvest at a later date, such haste could result in reinvestment risks and added transaction charges!
But this doesn't mean that you definitely SHOULDN’T sell your mutual fund units.
Well, there could be several reasons when you should exit from your Mutual Fund holdings, irrespective of the market movements. So, here's a guide on how to time your investments and find the right time to sell your equity mutual funds.
Reasons to Sell Your Mutual Fund Holdings:
1. Sell when Your Goal is Reached:
You invested in mutual funds with a purpose! Your mutual fund investments are always tied with a goal (say children's higher education, owning a house/car, retirement planning, etc). As soon as you've progressed towards your goal, and attained an 'x' amount in the given timeframe, you ought to take the conservative approach. Imagine you’re planning to buy a house in the next few months. You'll require these funds that you've earmarked for the goal. This is the time when you should exit your mutual fund holdings and switch your units to a debt/liquid fund if time permits. Such allocation protects you from any potential losses in case of a sudden fall in the markets.
2. Sell when there's a Drift in Investment Style:
As per the recent SEBI mandate that saw recategorization of a large number of mutual fund schemes, a change in the investment style is the right reason to sell. For instance, you invested in a multi-cap fund that drifted its investment style and now has a substantial mid-cap stock holding. Here, if you're a moderate-risk investor, you should look for better schemes that suit your risk appetite. Although it's worth mentioning, style drift can be a tricky issue. While there's a change in the mandate, you might be contemplated to stick with the fund for its superior performance over its peers. In such cases, you should evaluate your decision and think about its long-term consequences.
3. Sell if Your Fund Has Continuously Underperformed:
As an investor, you always seek alpha. You expect that your fund while outperforming its peers should also outpace the benchmark index and generate alpha (extra returns over and above the index returns). Well for this, you should definitely allow your fund some time (at least a couple of years) to deliver performance. But what if your large-cap or mid-cap fund continuously underperform its benchmark, let alone outperforming its peers? Well, it's time to join a different bandwagon. You lost a couple of years of performance but you don't owe anyone. Finding a better alternative is the right strategy.
4. Sell if there's a Change in the Fundamentals of Your Scheme:
One of the reasons to sell your MF units is if you're not comfortable with the changes in the fundamentals of your scheme. Say your fund manager changes or there's a change in the investment objective of your scheme. Chances are you won't be comfortable with such change. Many investors invest in a particular fund mainly because they love the track record of that fund manager. But when the reason has left, there's no need for you to stay as well!
Alternatively, you might find that your scheme has drifted to a higher concentration in a single asset type. In an unfavorable situation, if such asset category happens to fall, it would erode your fund’s NAV at a faster pace.
So, weigh the pros and cons of your decision and if you happen to hit the EXIT button, find a suitable alternative and switch.
Lastly, portfolio rebalancing is also an important factor to exit a part of your MF holdings. Diversification is an important pillar of investments and investors should definitely follow their principles of asset allocation. Fundamentally, there are two reasons why you should rebalance your portfolio:
- Reallocation due to Market Factors: When you start investing, you have a particular asset allocation in mind with x% of allocation in equities and y% in debt. Now, with markets soaring, your equity allocation will have outperformed the debt part. Hence it’s advisable to review your asset allocation periodically, and in special situations, it's apt to rebalance your portfolio.
- Reallocation as per Different Phases of Life: Young investors within the age group of 25-30 who have just started their career have the risk appetite to effectively sail through market volatility. Investors in such age group are more likely to start investing in pure equity funds. However, at age 55-60 when retirement is just around the corner, their investment approach will be more conservative. They would rather feel safe with debt funds that offer low returns then to face the risk of equities. Thus, you should also review your portfolio as per the phase of your life and accordingly rebalance your portfolio, eventually reducing the overall market risk.
So, keep up with your investment goals and sell only when you need to, not because you find the markets have maxed out. Remember, glass ceilings are always meant to be broken. But if you find it difficult to keep up with the researching bit, we at 5nance are here to help. Our expert advisors offer well-researched and trusted financial solutions to help you sail through the market volatility. Contact us at 022-67136713 or drop us a mail at ask@5nance.com to find more.
