There are lots of investors who know when to enter the market, what type of investments to make and what to choose but a very few of us know what is the right time to exit from the investments. While there is a lot of buzz about the right time to enter, very few of us talk about the exit strategy. Although less talked about but is one of the most important strategies to have.
Exit decisions especially are the ones taken impulsively, ultimately leading to a loss statement. Like it is important to have a goal, the same ways having an exit strategy is quite important.
Although the general belief is longer investment pays off better but you should have a plan as to for how long should you hold the investment. Having a disinvestment plan helps you determine what is the right time to exit a given fund. There have been instances where a mutual funds performance was better 6 months before the current state. Had you been following a disinvestment plan; you would have reaped greater returns for the same rather than holding on to the fund for an overly long period.
Yes, the market volatility does play a major role in defining the fund performance but if observed closely, lack of disinvestment plan affects much more adversely during the favorable times.
When you have a fixed goal towards which you have been saving and investing your money, you would know when the goal is about to be achieved. It is advisable to start gathering about a year ahead of the actual maturity date. Planning your exit from the particular fund 9 to 12 months prior will make to systematically allocate the wealth and not make an impulsive decision. Rather than selling off the complete fund at one go which will reap a fixed benefit at the then prevailing rate, you should start selling the stocks in portions in order to gain best returns during the favorable markets.
An STP or SWP is the best rescue for this approach. Making a one-shot sell-off is far riskier than gradually transferring or withdrawing money at different interest rates. STP would also enable you to transfer funds to less risky and volatile funds like debt funds if you wish to re-invest your money and take out only the returns depending on your need.
HAVE AN EXIT TRIGGER
There can be situations when transferring is not an option or maybe even during the tenure of investment few situations may arise which trigger exiting the investment. It is suggested to exit only when;
- In case of an emergency
If in case of an emergency or financial crisis, you can consider exiting your investments. The situation is this exit should only arise after you have considered using your emergency funds. if the emergency funds also fall short for the situation, consider liquidating the investments.
- Change in the management team
In case the management team especially the fund manager of your funds has changed and the performance of the funds have degraded since then, you may consider exiting your investment.
If there is no change in the fund’s performance, you must keep going with it.
- Change in the strategy of fund or fund house
If there is a change in the fund’s strategy or the fund house is undergoing a major change on the leadership level, it will affect the investment objective of your fund. This may be considered as a signal to review your investments.
- Under-performing fund
If your fund has been a low performer for quite some time, around 18 months ideally, you may consider quitting the fund and reallocating your money to other better performers. Do not base this decision on short-term market fluctuations which rebound after some time. Consistent under-performance must be taken into consideration for the same.
- Portfolio rebalancing
If you feel there is a need to rebalance your portfolio considering your risk appetite and overall financial goals, you can exit some investments which do not align with your goals.
Quitting a mutual fund should be a planned move. Emotion, impulse, and hear-say must be avoided in all conditions. Exit from the investment must be well-thought and planned. All investments must be made towards a goal and once you have achieved a goal, you must plan your exit from the investment. Being greedy towards investments may prove fatal later on due to market corrections. You can always transfer your funds to another investment avenue and reap the perks of returns.
A well-planned exit should be supported by a systematic withdrawal plan for the best results.