Enjoyed a bull ride in the market? But still worried that the recent meltdown would 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 smart decisions. So read on!
As an investor, you might often get confused with the timing of selling your mutual fund investments. A hasty decision might lead to reinvestment risk and related transactional cost while you miss out on the opportunity to gain extra returns on your investment.
So when it's almost impossible to gauge the market direction accurately, should you consider selling your mutual fund investments this year?
Well, there are a good number of reasons to sell your investments but just because 'markets are at a lifetime high and you're tempted to book your profits' isn't one of them.
But before we get into the eventual discussion about timing and selling your investments, let's first understand the different market cycles and ideal holding period for mutual funds.
Stock Market Cycles:
Often associated with general business cycles, understanding the stock market cycles is the key to generate maximum returns from stock markets or in this case mutual fund investments. Well, it's no secret that over the long-term, stock markets tend to generate higher returns on investments. That's ideally because the market has passed through all the four different phases of a market cycle.
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 a common investor is that they either fail to recognize the cyclical nature of the market or tend to forget that every bad market phase ends. The fear during a meltdown leads them to book losses and exit out of their investments.
To generate maximum returns, an investor needs to stay invested during all four phases of the market cycle and for as long as they can stay invested. As a matter of fact, they can also make additional investments during a downturn in the stock market. This practice helps them in bringing down their average cost to benefit from the bullish trend in the next market cycle.
So 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:
1. 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. In case you achieve your target a year or two earlier, do not hesitate 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' number of years and once you hit your target, simply redeem your investments or you might be in for a rude shock.
2. 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. A lot of mutual fund schemes were amalgamated and many investors saw changes in the basic attributes of their schemes.
If such changes are not in line with your investment style, you should exit the fund even if it's outperforming. Find a new scheme that best suits your risk appetite and switch your funds.
3. Continuous Underperformance:
Well, you should definitely give some time to your investments. But remember that you're here to make money not to 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. It might be possible that even when the markets are outperforming, 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 a bad shape.
4. Rejig in Your Portfolio:
At times, after 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.
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 fail to understand the Power of Compounding. It's imperative to liquidate your investments during emergency situations. In other cases, always remember that the longer you stay invested the better. But be sure to make smart decisions and not hasty ones.
At 5nance, we provide you with customized exit advisory when it comes to mutual funds. 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!