What is a good time to exit your investments?

Gautam had invested in a few equity mutual funds for the long-term. He did not monitor the performance of the funds regularly, and they turned out to be a mixed bag. The markets have been quite volatile of late, and his funds’ NAVs have not gained much over the past one year. He is wondering if this is the right time to exit his investments. Should he exit completely or only partially? Should he wait out the volatility and redeem only when he needs the funds?

Gautam must have made the investments with a goal in mind—buying a bigger car, his child’s education, a second home. If his investments have already fulfilled his objectives, then it might be a good time to exit the non-performing funds.

He must not overshoot his investment horizon in a volatile market, since there is a chance that his gains will get wiped out, leaving him with no option but to stay invested for a significant period of time without reaching his investment goals. Also, he could consider a partial exit from his investments in case there is a change in his life goals or risk appetite, owing to some unforeseen circumstances, such as job loss or an illness.

If a fund is a consistent underperformer compared to its benchmark and its peers in the same category, it might be a good idea for Gautam to exit that fund and select an alternative one to achieve his target. Further, he must ask questions such as: have there been any changes in the fund’s structure, objectives or management strategy of late? If the answer is yes and it is causing a conflict with his personal investment objectives, then it might be a valid reason for him to consider exiting a fund.

Exiting investments in a volatile environment is not an easy call to take and he must not let the market scenario alone guide his investment decisions. He should base his decisions on rational reasons rather than panic, fear or greed. Gautam should evaluate his decision to exit mutual fund investments based on two parameters, the first is his personal portfolio objectives and second, any issues with the mutual fund itself that may require him to redeem and transfer funds into an alternative investment.

(The content on this page is courtesy Centre for Investment Education and Learning ( CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)