Mutual Fund Industry
| April 11
When buying mutual funds, you are often advised to keep a long term horizon and give a few years time for your investment to grow. However, there may be times when you need to take the exit route. Let’s take a look at when and why this can happen.
1. Personal Reasons
Unless it’s the case of financial emergency and you don’t have any other way to raise money, it is better to stay invested in the mutual funds. However, if your investment objective or risk appetite has changed (heavy investment in equity in 30s, more inclination towards debt funds in 40s), you had invested for a short-term objective (to buy a car or pay for higher education of the child) which is about to be met or you are nearing retirement (you want assured monthly income), it makes sense to exit.
2. Poor Performance
You should regularly monitor the performance of the mutual fund vis-a-vis the benchmark index and peer funds in the same category. A bad quarter or for that matter, even half yearly results are not clear indicators of the fund’s performance. But, if the fund is persistently underperforming and delivering poor returns over a period of 6-8 quarters, you may want to consider dumping it.
3. Change in the Fund Manager/Fund House Management
While buying a mutual fund, you must have looked at the reputation of the fund house or the experience of the fund manager. Over a period of time, there may be a change in the top management due to merger, acquisition or some other reason, their investment philosophy may change, or the star fund manager may decide to quit. If the performance of the mutual fund starts dipping within one to two years of such change, it’s time to plan an exit strategy.
4. Change in the Fund’s Investment Objective
Every mutual fund has its objective in terms of risk, return and time horizon. When you invest in a mutual fund scheme, you ensure that your investment objective is aligned with these parameters. In ideal conditions, the fund will not deter from its mandate. But, the fund house may decide to rebalance the asset allocation if the mutual fund is not performing well or to adapt to the market conditions. For instance, you had invested in hybrid mutual funds for a balanced risk-return trade-off. But, if the fund starts leaning more towards equity, your risk exposure gets higher too. Or, let’s say, you had invested in blue chip companies, but the fund house starts buying small cap stocks. Such instances are your clue to get rid of the fund.
5. Steep Expense Ratio
Mutual fund companies deduct a certain fee from your investment towards managing the fund on your behalf. This fee also known as expense ratio, typically includes administration, legal, marketing & transaction costs, distribution fees and the fund manager’s remuneration. A lower expense ratio means that a greater part of your money is invested in the market to earn better returns and vice-versa. Usually, the expense ratio of an equity fund is between 1.5-3% of your investment. If the expense ratio soars, it wouldn’t affect the performance for 6 months to 2 years. But, over a longer period, such as 10-15 years, this fee could significantly eat away your corpus. So, even if there is a tiny percentage point difference in the expense ratio, and you find it impacting the returns considerably in the long run, do not hesitate ditching the fund.
6. Poor Judgement
Irrespective of adequate market research and due diligence, you may end up investing in bad mutual fund. Or, may be the mutual fund is performing well, but it is not adding any value/diversification to your portfolio as per your expectations. You may discover that it is too volatile or placid for your taste. So, you may want to divest yourself of such mutual fund.
7. Policy Changes
If there is any policy change through SEBI or economic policy of the government, it could adversely affect the performance of the mutual fund. For instance, if the recent GST bill have a negative impact on the telecommunications sector and if your fund has a big allocation in that sector, you might consider exiting it.
What Next – How to Exit Mutual Funds?
* Contact your fund house or financial advisor to guide you for the exit process. You can sell it offline through AMC/distributor, online via a trading account/AMC website or even through central service providers such as Karvy and CAMS. Do note that mutual fund units can be sold only after the lock-in period is over.
* Find out the exit load on sale, applicable taxes and any other charges levied on the redemption of the mutual fund units.
* Fill the redemption form which requires your personal details, folio number, scheme details, number of units you wish to sell and bank account details.
* The redemption request submitted before 3 pm on a business day will fetch the same day`s NAV, while that submitted after 3 pm will be calculated on the next day`s NAV.
* After the redemption request is verified, it takes 3 business days for the proceeds to be credited to your bank account in case of an equity fund. For most of the debt funds, redemption proceeds are credited in 1 business day.
* It is advisable to re-invest the proceeds instead of spending it or letting it stay idle.
Mutual funds are subject to the market risks. So, don’t be surprised if mutual funds start underperforming and your investment turns sour. The bottom line is that a mutual fund can under-perform even if it has a good track record and predictive value.