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How and when to exit from equity funds? Explained with 5 scenarios


When you should consider selling your mutual fund units?

Pawan Parakh, Director & Portfolio Manager, of Renaissance Investment Managers said “Honestly, there could be multiple reasons why one should sell funds. Let’s discuss a few scenarios. Every fund is launched and managed with a stated objective, which could be an investment style or a theme or something else. Whenever there is a deviation from the objective, investors should definitely consider selling the fund. In another scenario, a change in the fund manager could potentially lead to the sell consideration. Poor stock selection and fund performance are strong reasons to exit a fund. In addition, there could be macro-economic reasons like slowing growth, high inflation or poor economic policies which could be potential reasons why investors should consider existing equity funds.”

Niraj Bora, Founder of Surmount Business Advisors Pvt Ltd said “See the selling of any asset, including mutual funds depends upon few factors for which you have made the investments. So for example, if you have planned a SIP for retirement, the time horizon won’t warrant any sale before you retire. Generally speaking, if you are investing on a short to the medium-term horizon, withdrawal should be done only when you have a clear better investment opportunity. Market cycles always prompt investors to sell in recessions. But that should not be the case. Let’s take covid as an example. Most of the stocks which were at all-time or 52-week lows in march’20 have recovered and crossed their all-time highs again. So, one has to look at the long-term angle and not withdraw unless you need to spend, or you have a clearly better investment opportunity ahead of you. See the selling depends on a variety of reasons.”

Niraj Bora said “Down payment while buying a house, wedding in a family, better investment opportunity, diversification into other asset classes, etc could be the probable reasons for one to withdraw. The key reasons you save (health emergency, education, down payment of house), reallocation of assets/diversification (buying property real estate, gold, direct stocks, other MF for balancing portfolio), etc should be the typical reasons one should withdraw. Else, even the tax implication would get down your overall returns if the withdrawal is high.”

Abhishek Dev, Co-Founder & CEO of Epsilon Money Mart Pvt Ltd said “Investment is always done with some goals in mind. Equity investments could help us to reach these goals as they historically provide one of the best inflation-adjusted returns among asset classes over a long period. This long period is important, as equity is volatile over short terms by nature. Investors can decide to exit based on various criteria:

1. Goal is met or reaching maturity, can park the money in a safe investment.

2. Your risk profile doesn’t match the investments made earlier, therefore can switch to less risky investment avenues.

3. Your fund has been underperforming for a long time; therefore, a switch to a better structured / performer could help.

4. You need money. This should be the last option. As taking out money means you are disturbing the process of compounding. Thus, equity investments should be continued for as long as possible.

5 reasons to sell stock or equity funds that you are holding

Ram Kalyan Medury- Founder and CEO at Jama Wealth- A SEBI-registered investment advisory firm said “It is easy to say that one has to buy low and sell high to make money in the equity markets. However, selling is one of the toughest decisions one can make. Most people err on the wrong side. No wonder many studies have proven that the average retail investor makes lesser returns than the market itself. Here are 5 reasons to sell stock or equity funds that you are holding.

1. The stock no longer meets your chosen investment philosophy or one that the fund manager has stated. In our case, we believe in Roots & Wings which stands for strong balance sheets coupled with growing earnings. If a company does not meet these criteria then it is a signal to exit. One may give some benefit of the doubt but the long rope cannot extend indefinitely.

2. There are corporate governance issues. It is not a surprise that episodes of insider trading or front-running emerge ever so often. If that is the case with something in your portfolio, give it a hard look and err on the side of caution.

3. Your rebalancing may ask for a strategic reallocation of investments from equity to debt. This will call for a sell action.

4. Your stock may have run up too much and you would do a tactical re-allocation and prune your exposure to it. Sometimes intra-portfolio rebalancing may call for selling minor quantities as well.

5. You need the money to fund a life event. The purpose of investing is to have a happy life. While one must definitely invest for the long term, one must also not hold on to equities forever.

Selling an investment is a complex event. Using some of these thumb rules will help make the decision less emotional and painful. It also helps assign a reason to the decision so that one does not regret it if occasionally a decision does not yield the best results. In many ways selling an instrument is akin to pruning a garden, something necessary for building an elegant portfolio.

What should be your selling strategy during annual review of equity mutual funds portfolio?

CA Manish P. Hingar, Founder at Fintoo said “Although it is of utmost importance to be consistent with your investments in equity mutual funds for the long term, but one should know when to take an exit. There are a couple of instances that one should watch for. Firstly, when you are closer to achieving your long-term goals, let’s say 2 years away, then you should start switching from volatile equity investments to less risky debt funds to preserve the corpus from any depletion owing to high volatility in Equity Markets.”

He further added that “Second instance would be when you become overweight in the Equity asset class over time, then it’s time to review your portfolio and rebalance it to reduce equity exposure according to your risk appetite and investment horizon. Thirdly, based on future market expectations, investors can exit from Equity Mutual funds to safeguard their short-term goals.”

“Currently, the Indian Equity markets valuations look too expensive. Markets have bounced back smartly and wiped out the entire YTD’CY22 decline. The Nifty is now up ~5% YTD’CY22. With this rally, Nifty now trades at a P/E of 22x FY23E and P/BV 3.1x, comfortably above the LPA, and offers limited upside in the near term. The Buffet indicator suggests that the markets are mostly overvalued. India’s Market Cap to GDP stands at 112% vs a long-period average of 79%,” said CA Manish P. Hingar.

“For the long term, Equity Markets look good, but from short-term perspective, there could be some corrections. Investors can partly liquidate their investments to be more cautious for short term goals. Lastly, when the scheme that you have invested in is underperforming significantly in comparison to its benchmark and category average. In such a case, one should switch to better-performing funds. Having said that one should not do it quite often. During annual review of equity mutual funds portfolio, one can take a call to switch,” stated CA Manish P. Hingar.

Should you sell your mutual fund units if a specific goal coming close?

Vivek Banka, Founding Team at GoalTeller reveals that “As most expert fund managers would tell you in equities picking the right stock isn’t a skill which is so unfound but it’s the skill of selling that requires immense expertise. However, does the same apply to equity funds? Unlike direct equities, equity funds are a vehicle more so for investors who don’t have either the time or necessary skill to do direct investing themselves and hence hand over the funds to a manager to manage it for them. In such cases, before we speak about selling, it is pertinent to buy equity funds only if your need for those funds are at least 3 years away and ideally 5 years if not more.”

“In such cases the decision to sell should be primarily based on the requirement of funds and / or a specific goal coming close for which the investment was made. Here one important thing to keep in mind is if the goal is known and certain it might be wise to systematically start withdrawing funds from equities so that any market movement doesn’t jeopardise the goal achievability. Viz if you’ve been saving for your child’s education for the past ten years in equity funds, you should start systematically withdrawing from equity funds anytime between 1/3 years of your goal in equal installments. Needless to say this should be in consonance with your overall Financial Plan,” said Vivek Banka.

Scenarios on which mutual fund units should not be sold?

Abhishek Dev, Co-Founder & CEO of Epsilon Money Mart Pvt Ltd said “Selling is a crucial decision. Therefore, it should be taken with care, or your returns take a toll. Selling when the market is undergoing a bear phase is a no as you will end up selling when you should ideally be buying. Thus, not only are you not taking advantage of better cost averaging but also letting go of the opportunity of better potential returns in future. Sometimes the market might be sideways, like the one we are witnessing now. In such a time funds could also underperform. Before selling check for performance vis a vis benchmark. If they compare well, there may not be a reason to sell.”

Niraj Bora, Founder of Surmount Business Advisors Pvt Ltd said “Temporary market sentiments, like the one mentioned above should not be the reason to sell mutual funds. Business and market have cycles, and the one who holds it in the downturn can make above average returns over a medium to long term with high probability. Another reason one should avoid withdrawals are for operating spends, or large and discretionary spends that don’t result in an asset that doesn’t grow with time or beat inflation. Once in a while is still fine, but this shouldn’t be a routine exercise.”

Pawan Parakh, Director & Portfolio Manager, Renaissance Investment Managers said “Many investors sell equity funds just because the returns are good and they are tempted to book profits. I believe this is generally not wise reasoning. Over the last 20 years, there have been several stocks/ funds which have been huge value creators thereby growing investors’ wealth by 10-20x. In a scenario, where an investor sold his investments after 2x return would have made great profits but would have captured only 10-20% of the overall value creation. A substantial part of value creation would have got missed. On several occasions, investors tend to react to short-term news flows, thereby monetising their investments. In a growth economy like India, this is counter-productive. Covid-19 was a classical example. Just like crash, many times, the rebound in the market is also so sharp that investors hardly get a chance to enter the market. Hence timing the market is a futile exercise for long-term investors.”

How to manage your financial goal while redeeming mutual fund?

Abhishek Dev, Co-Founder & CEO of Epsilon Money Mart Pvt Ltd said “Lets take a hypothetical example: You started investing a certain sum each month for a period of 20 years for your children’s education. Now you’re approaching tenure and may start requiring money anytime soon. In such a scenario, it makes sense to redeem the money from equity funds and switch to safer investments like a debt fund. In this way, your money is safe to be used for the specific goal and compounds, albeit at a lower rate.”

“We believe that to achieve a financial goal, asset allocation is the key. One cannot go heavy on a particular asset class while ignoring the other. Thus, after setting a goal, money should be deployed in a mix of investment avenues. This can vary as per the investor’s inclination for risk and their expectations,” he further added.

Niraj Bora, Founder of Surmount Business Advisors Pvt Ltd said “Redemption can happen for a number of reasons (personal or otherwise). The way one can keep the goal intact and keep on achieving it is to invest more on a monthly basis to target the goal. When anyone starts a SIP or some type of MF investments, they plan it for the salary they get at that point in time. So, increasing the monthly outgo can be easy over time, and that should be done in order to compensate for withdrawals or to achieve the goals before time.”

Pawan Parakh, Director & Portfolio Manager, Renaissance Investment Managers said “In the investment-making process, investors should have reasonable clarity on the financial goals that it wants to achieve and also the timelines over which the goals are to be achieved. This is a reiterative process right from the inception to subsequent top-ups or redemption. Investors’ approach should be extremely systematic and disciplined throughout the investment journey. This would include the right mix of asset class, fund selection and risk awareness. If required, they should seek advice from a reliable financial advisor.”

When to re-enter the equity market?

Abhishek Dev, Co-Founder & CEO of Epsilon Money Mart Pvt Ltd said “It is not timing but time in the market that helps you achieve your goals. It is better to stick around and bear the fruits of compounding. It is worth noting that one of the greatest investors of our time, Mr. Warren Buffet earned 99% of his wealth after his 50th birthday. Such is the power of sticking around. We believe in holding forever until the investor must undergo any of the aforesaid reasons. Safer investments like fixed deposits, debt funds, can be explored. Also, if it’s equity’s volatility that investors are varied about, they can switch to Hybrid funds.”

Niraj Bora, Founder of Surmount Business Advisors Pvt Ltd said “Downturn or recession is the best time to enter the market. Now that the recession fears are looming around for some time (more so globally than in India), one can identify funds that focus on value and fundamentals rather than pure statistical upsides. So, fundamentally and value-based good stocks can give very good returns over a medium to long-term horizon. Generally, for the salaried class, SIPs are the best way to invest in the market. So, the impact of timing-based returns is reduced a lot, and averaging out the pricing in the market helps to generate minimum average market returns in the portfolio.”

Pawan Parakh, Director & Portfolio Manager, of Renaissance Investment Managers said “In my opinion, it is practically impossible to time the market. More importantly, equity returns are never linear. There could be a few years of muted returns and a huge bounty in a particular year. Against this backdrop, investors should continue to remain invested in equities with a long-term view. The allocation towards equity in the portfolio can be increased or decreased based on the macro-environment, however, a complete exit is never recommended. History tells us that investing in high-quality stocks during bad times has turned out to be the best investments in the medium to long term.”

After selling equity MF units which other investments should be considered?

Niraj Bora, Founder of Surmount Business Advisors Pvt Ltd said “There is no thumb rule as such, but in my view, once your MF portfolio is large enough other assets should be considered in order to reduce shocks or tanking in value. Other options include REITs, buying a property directly, gold and commodities, investing in direct stocks, buying into a small case type portfolio, etc. One should read and understand these asset classes and see which ones are fit for them in terms of diversification, allocation of funds to each of these assets, etc. Reading and understanding these assets are critical before investing to know how the returns are linked to various market dynamics, liquidity aspects, etc.”

Pawan Parakh, Director & Portfolio Manager, Renaissance Investment Managers said “Different asset classes have a varied return, risk and liquidity considerations. This right allocation amongst asset classes is a function of several factors like age profile, risk-bearing ability and future liquidity requirements amongst several others. Hence the alternative to equity MF would change on case to case basis. Investors should seek reliable financial advice wherever required.”

Bottom line

Niraj Bora, Founder of Surmount Business Advisors Pvt Ltd said “To summarise and conclude, one should invest in MF for medium to short term, even if circumstances need them to withdraw early. Restart investing once you are in a better position to invest, and build a good portfolio. Start understanding and reading other asset classes, and start investing in them in small amounts. Once your MF portfolio is big enough, you should have a diversified portfolio which would be more resistant to market shocks, and you understand better about various asset classes to know which ones fit your investment and risk profile.”

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