When should you sell your mutual fund system?

Your mutual fund may have had good returns in the past. However, there might be some signs of poor performance and you might need to drop out of such MF schemes. There are various reasons/scenarios where you may need to sell your mutual funds.

1) Underperforming compared to benchmark: If your MF is not delivering good returns, there could be several reasons. However, if your mutual funds are underperforming the benchmark, you should review the program details and sell such mutual funds. Example: If a large cap mutual fund’s “X” program has produced 10% annualized returns over the past 5 years compared to SENSEX, which has produced 13% annualized returns, then your X program is underperforming. You should check the reasons before leaving.

2) Change of fund manager: The fund manager is the backbone of the performance of the MF program. If the existing fund manager who has managed the funds well changes, you should check the new fund manager’s past history. If the fund manager has insufficient experience, you should review your mutual fund and exit accordingly.

3) RBI Repo Rate Impacts Debt MFs: If the RBI lowers repo rates, bond yields will fall and prices will rise, which would improve debt fund returns. When you see interest rates going up, the returns on your debt funds go down. Therefore, in this situation, you should take a call and get out of debt funds. However, you should check the direction of the RBI towards the repo set and not just one instance.

4) Payback Based on Your Goals: Although your MFs are performing well based on your financial goals, you may need to switch between equity and debt. Eg during retirement when you need to reduce your exposure to equity funds as there are risks involved. Another example is reaching a planned financial goal 2-3 years in advance. In this case, you cannot invest in stock funds until the last minute of the goal. You can sell equity MF and then invest in debt funds or debt-related instruments.

5) Doesn’t meet your goal: If you bought an MF that doesn’t meet your goal or objective, you should get out immediately rather than regretting it and leaving it as is. For example, mid-cap funds can only be contributed by high-risk investors. If you’re a low- to medium-risk investor and have bought mid-cap funds, you should exit immediately.

Final Note: When investing in mutual funds, keep these reasons in mind so that you can exit mutual funds appropriately and invest in better funds. This way, you can get good returns from your entire mutual fund portfolio.