Exit Strategy in Mutual Fund Investment – Reasons to Exit, Strategies, Tips & more

Know everything about Exit Strategy in Mutual Fund Investment here. Find details like the various reasons to exit or sell your mutual fund, Strategies & Techniques used, Process & more.

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About Exit Strategy in Mutual Fund Investment

Many mutual fund investors can easily determine when to invest, where to invest, and how to invest in mutual funds.

But, most of them struggle with when to Exit from Mutual Fund.

As an investor, SEBI allows you to redeem the number of your shares at any time. Every individual investor must be aware of when to buy or sell a mutual fund at the correct time.

It might not be possible to know the duration of an investment, but it is very important to have an exit strategy in mutual fund investment.

Various factors can affect an investor’s decision to end an investment, like personal choices, fluctuations in the market, or any kind of changes in the fund management.

One usually gets impulsive with investment decisions. For example, many individual investors withdraw from the investment as soon as they see a gain or a loss.

However, that is not an advisable mutual fund strategy since most of the investors have certain goals with their investments.

It is always wise to stay focused on the main objective, along with having an appropriate exit strategy.

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When should you Sell your Mutual Fund Investment?

Knowing when to exit from a mutual fund investment is one of the biggest dilemmas faced by investors. Here are a few situations by which you can recognize when to end a mutual fund investment:

Achievement of the Goal

Achievement of the pre-set goals in a mutual investment is the most basic and common reason for exiting a mutual fund.

This main goal could be anything like purchasing a car or a house, higher education for your children, or your retirement plans.

The fundamental objective of such long-term financial planning is to achieve all your pre-determined goals within a specific time frame.

Therefore, the achievement of these financial goals is one of the apt reasons to sell a mutual fund.

Consistent Poor Performances

The performance of a fund is one of the essential factors by which an investor can decide if he/she should continue or exit from the investment.

An investor must not be worried about the temporary falls in the market. In case the funds are underperforming for a long time, it is always better to end it.

This way, an investor can prevent any kind of irreparable outcomes in the future.

Change in the Fund Management

Change in the management of a fund or the strategy of a fund manager plays a major role in the performance of a fund.

This reason does not always mean an immediate exit from the investment, but the fund investors must remain watchful of the fund’s activities from time to time.

As long as there are no major changes in the main investment goals, there is no need for an investor to worry about such changes.

Change in an Investor’s Risk-Return Profile

Sometimes, an investor’s risk-taking abilities may undergo certain changes due to certain circumstances.

For example, an investor who has an aggressive risk profile may change his/her priorities to conservative risks because of some financial conditions.

Such decisions are essential while considering when to exit from a mutual fund investment. Any kind of unforeseen emergencies also plays a huge role in the continuation of investment.

Re-balance Your Portfolio

Sometimes, an imbalance can occur in the asset allocation of your investments.

This usually means that the debt-equity ratio of your investments is producing lesser results as compared to your original investment.

Timely review of your investment portfolio is very important to maintain a proper balance between all of your assets.

You need to acknowledge which assets are causing losses and which ones need to go away to maximize your returns.

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Exit Strategies worth checking out in Mutual Fund Investment

One has to consider various factors while exiting from mutual funds. A proper exit strategy in a mutual fund investment will maximize the number of returns for an investor.

Here’s a list of few strategies you should consider while exiting from a mutual fund:

Allocating Your Profits

Once you exit from an investment, every investor needs to follow a well-thought-out process afterward.

The profits you earn from one investment should be used judiciously and can be reinvested in other financial goals.

If an investor experiences opportune economic and market growths, he/she could deploy these profits to other existing investments.

Profit booking can also be used to rebalance your portfolio and redeploy them as per your preferences.

Exit Load

An exit load refers to the fee that Asset Management Companies charge their investors while exiting or redeeming their shares.

This load can make a huge difference in the total amount of money you get from your share in the investment.

Being aware of such exit loads is essential for every investor as it also affects their decision to end a mutual fund investment.

Also, if the value of your funds is greater than the original amount, you are subject to capital gain tax.

Diversifying the Portfolio

Diversifying your investments in multiple categories is one of the best exit strategies to have in a mutual fund. For example, let’s assume you have investments in both equity and debt funds.

During a market rise, equity funds will give a boost to your portfolio performances, while the debt funds will offer stable returns with lower risks.

During a fall in the market, your debt funds will limit the losses of your equity funds.

Approaching Your Financial Goals

The ideal exit strategy in mutual fund investment when your financial goals are approaching is to start exiting from the equity investments 2 to 3 years ahead of your main goal.

Later, you can invest the amount in safe debt investments to avoid any losses due to market swings.

For example, if a person was investing to save Rs.20 lakhs by the year 2025, he/she should change the fund scheme by 2021 to prevent huge losses and get a steady return.

Do Not Be Fooled By Star Ratings

The star ratings or reviews must not influence your decision to enter/exit a mutual fund investment. These ratings usually change from time to time.

Basing your entry/exit plans on such ratings can be imprudent. This is because the parameters used by the company’s analysts to determine the star ratings might be different from your opinions.

This can also cause a tremendous impact on the number of returns.

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Tips regarding Exit Strategy in Mutual Fund Investment

Mutual fund investment is completely based on probabilities and patience. Markets can rise and fall constantly.

While an investor should carefully think about all the strategies to imply, he/she should also not withdraw from the investment just because it has underperformed in a couple of quarters.

Every investor needs to be persistent and calculative about the number of risks they take and analyzing each return vigilantly.

If you can recognize that you have earned enough from your investments, do not take the risk of prolonging your exit.

A well-planned exit strategy in mutual fund investment is as important as the process of investing in it.

Check all of your mutual fund statements regularly, and be aware of the exit loads and capital gains taxes that your company charges to general customers.

Volatility in mutual fund schemes can cause a large number of losses with no profits. Thus, a proper strategy is necessary to maximize the amount of your share from the final returns.

It is easy if you’re using an Asset Management Company. Set a wide exit-plan for your diverse portfolio.

You can also do some research on the internet for more exit strategies or talk to experienced investors.

Conclusion – Exit Strategy in Mutual Fund Investment

Lastly, when exiting, try switching out the proceeds of one investment into another scheme. Please do so if you don’t have immediate use of your returns.

This is called a Systematic Transfer Plan (STP) and is a very apt exit strategy used commonly by many investors.

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