Strategies to Adopt While Investing in a Mutual Fund

Some of us might know about the excerpt from Mahabharata where Abhimanyu was in Subhadra’s womb and he heard the conversation about the Chakravyuha from Arjuna. He heard the conversation up until the art of breaking into the Chakravyuha. Unfortunately, there was an interruption in the conversation when Lord Krishna took Arjuna away and he did not get any further information on how to exit it. Due to the lack of knowledge, Abhimanyu was attacked and led to his demise. Similarly, partial knowledge can be dangerous in investment. 

Majority of us know how,when and where to invest. But what most of us do not know is  when to exit from their investments. At the same time, people take impetuous investment decisions. For example, every time there’s a profit, people decide to withdraw or when there’s some loss after consistent gains, people tend to redeem. However, we should refrain from taking haste decisions when it comes to withdrawing money. It is crucial to have an exit strategy which ensures that the goals are achieved. 

How to plan an exit strategy?

When you are investing for an objective, say, buying a car, your target is Rs 9 lakh. When you are very close to your goal, say Rs 8 lakh, you should start an STP (Systematic Transfer Plan) to a liquid fund or a short-term debt fund, if you have been investing in an equity fund. This will protect against any unforeseen events and volatility in the equity markets.

For example, you invest Rs 10,000 per month for five years. This habit of investing started in 2011. By 2016, you need to pay your child’s education fees of Rs 8 lakh in one go. Now, consider that the investment has given you average returns of 11 per cent per annum and helped you to accumulate Rs 6.2 lakh by June 2016. Rs 6.2 lakh is 80 per cent of the corpus you need. It is imperative to safeguard the return earned as there is a chance that you might end up busting. 

How to Safeguard?

On 8th November, 2016, Demonetisation was announced. Due to it, the market crashed and the indices corrected in double digits. After earning Rs 6.2 lakh, if you would have been greedy and continued to be invested, you wouldn’t have been able to achieve the target amount. But had you withdrawn the amount through Systematic Withdrawal Plan (SWP) or STP, you would have been able to safeguard 80-85 per cent of the target amount. 

When Should You Start Withdrawing?

Ideally, one should start withdrawing the money 9-18 months before the money is needed. 

How Should You Withdraw?

One should avoid withdrawing money at once as one may lose the opportunity to generate returns. Thus, it is advisable to opt for a Systematic Withdrawal Plan (SWP) or Systematic Transfer Plan (STP).

SWP or STP allows you to take out the money in a phased manner. This way, you will be able to park your money in a safer fund that has low volatility, such as a debt fund or a money market fund.

Know When to Exit

It is noted that quite a number of times, individuals exit investments before the goal is achieved. Exiting the investment is suggested in the below mentioned scenarios:

   Emergency– In case of any financial emergency, if you are short on funds that cannot meet the requirement, you should consider liquidating your investments.

   Personnel Changes– There is a direct relationship between the ability of a fund manager to manage the fund in a volatile market and returns generated. As long as there is no change in the fund manager, an investor does not need to worry. 

   A Fundamental Change in the Fund– An investor invests in a fund considering his risk-taking capacity and risk element involved. In the case of objective or strategy change in the fund, the investor should be careful and withdraw money if things are not favorable. 

   Underperformance– As mutual funds are subjected to market risk, a fund should be evaluated from a long-term standpoint and not through short-term parameters. If the fund is not outperforming its peers and the benchmark, and it has volatility in its performance, then one should consider exiting the investment. 

   Portfolio Rebalancing– Asset allocation to one asset class may change due to better performance than others. For example, if you have invested Rs 5,000 in fund A, and Rs 5000 in fund B, it may happen that at the end of the year, fund A gives you Rs 7000 and fund B gives Rs 10,000. When you had begun your investment, both the funds had the same weight on your portfolio. At the end of the year, fund B has taken a significant share of the pie. If in the future, the fund B were to perform badly, then your investment would see losses. In such a case, you can consult an investment advisor.

Conclusion

As everyone wants to fulfill a financial objective with mutual fund investing, good planning of exit strategy from mutual fund investment is extremely crucial. When one gains a sizable amount for his goal, one should avoid greediness and protect the generated wealth. Plan your exit strategy beforehand as it is challenging to make accurate predictions for the market.  

The author is Co-founder, Tarrakki

 DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.