Mutual funds are one of the most secure and rewarding investment avenues. Investing in a mutual fund through a SIP (systematic investment plan) is even better because it instills a habit of saving, reduces the overall risk of investment, gives you the benefit of rupee cost averaging and automatic timing. It may seem illogical to redeem a mutual fund investment even if it is performing well, but there are several reasons to pull out your investment even if it is doing well. Here are a few reasons why you should quit a well-performing fund:
- PORTFOLIO REBALANCING: When the mutual fund market changes, it increases or decreases the value of the portfolio. This can cause your asset allocation to become unbalanced and you might be taking more risk than you are comfortable with. Rebalancing is the process of buying and selling assets to restore your portfolio to your target range. This can help reduce the risk in your portfolio.
- WHEN YOU HAVE ACCOMPLISHED YOUR FINANCIAL GOALS: A mutual fund is started to achieve a specific goal like planning for a child’s education, buying a house, planning for a foreign trip and so on. So basically you should have the discipline to stop the SIP when you have accomplished the financial goal. Greed is never good. You might be putting your investment into jeopardy by continuing the SIP.
- CHANGE OF THE FUND MANAGING TEAM: Mergers and acquisitions happen all the time in the financial world. If the fund management team or the manager of your fund changes or a merger is on the cards, then you could consider stopping the SIP. When any of these things happen, the fund’s policies and investment goals may change which are not in line with your goals. You should also consider shifting or stopping the investment if the new fund manager has a bad track record.
- BAD PERFORMANCE AS COMPARED TO PEER FUNDS: For instance, your fund gives a return of 15% which is a fair return if you don’t compare it with peer funds. But when you compare your fund with peer funds which give returns in the range of 18% – 20%, you notice that your fund is lagging behind. No doubt that your fund is performing well, but it should be at par with the peer funds. This reason is enough to shift to a better fund even if your fund is giving a decent return.
- CHANGES IN THE FINANCIAL ENVIRONMENT: Unstable financial environment may cause changes in the economy. These changes can sometimes be unfavorable for your fund. For example, your fund is rendered as less tax-friendly after a budget announcement. Shift your investment to a new fund because investing in the current fund will have a negative impact on your returns.
- CHANGES IN FUND OBJECTIVES: You should exit a mutual fund if the fund alters its risk and return objectives. Those objectives may or may not align with your financial goals. If the new objectives suit you, well and good, if they don’t, shift to a better mutual fund with which you can align your goals.
- EXCESS VOLATILITY: Your fund surpassed the benchmark in several months and underperformed in several months. This makes your fund highly volatile and risky. Taking huge risks is not good for your financial goals as well as for your portfolio.
So, these are some reasons for not continuing your investment even if the return from the mutual fund is on the positive side. Staying invested in these situations will ultimately hamper the returns from the mutual fund.