When it comes to mutual funds, diligent investors can find plenty of information in the public domain that can help them make their investment decisions. There is information on how to invest, when to invest, which funds to choose, how to choose funds, the risk involved in mutual funds and much more. However, there’s not much to be found on exit strategies for mutual funds, typically making this the biggest challenge for investors. Having conviction around an exit strategy becomes especially relevant whenever markets correct; without it, investors panic and exit based on sentiment rather than a well-planned strategy.
Many times investors try to time the markets by exiting their investments with a hope to re-invest at lower levels. This is a classic case of “market timing”. Also, at times, investors tend to treat mutual funds like stocks. A stock can be underpriced or overpriced and hence, there could be a case to exit an expensive stock vis a vis a mutual fund. A mutual fund, on the other hand, is a basket of investment products and the price of each unit reflects the value of the products in the basket. Hence, the question of over-valuation or under-valuation does not arise.
Knowing how to exit from a mutual fund is as important as knowing when to exit and can make or break your wealth building process. Exiting from a fund should not be done based on market swings, except in case of emergencies. One must do it thoughtfully, with a plan of action.
Here are a few instances when an investor should consider exiting from the scheme.
1. Achieved or Nearing Financial Goals? Exit from the Scheme and Invest in Less Risky Assets
When you are nearing your financial goal sooner than expected, your focus should be on preserving the corpus. When you are nearing your goal, your ability to take risks reduces. Remaining invested in an equity fund once the goal is reached could be counterproductive at times.
If you have achieved your financial goal earlier than planned, you can exit from the scheme and shift your corpus to a liquid fund or even a bank fixed deposit to preserve the accumulated amount.
Either way, to protect the corpus you have amassed, when you are one or two years away from your goal, switch to less risky funds where the equity component is negligible.
2. Want a Regular Income from your Mutual Fund Investment and Seek to Preserve your Capital? Do Systematic Withdrawal Plan (SWP)
If you want a regular cash flow from a mutual fund scheme, do not switch the same to a dividend option. It will be more efficient if you follow a SWP. This is an excellent facility, offered by mutual funds and it is also extremely tax efficient.
When you choose a SWP …….