What is the Strategy To Exit From Mutual Funds? - Groww (2024)

In the legendary Mahabharata, an incident involving Abhimanyu teaches us a valuable lesson about mutual fund investing.

Abhimanyu, while in his mother’s womb, learnt the art of Chakravyuham when his father, Arjuna, explained it to his mother. However, Arjuna never got around to completing the story and left out one crucial aspect: how to exit the Chakarvyuham. As a result, when Abhimanyu pierced into the Chakravyuham, he found himself trapped and had to sacrifice his life.

Similarly, when it comes to mutual funds, most discussions revolve around making investments. Little attention is given to the equally important topic of how to exit and protect your money.

In this blog, we will shed light on the often-overlooked aspect of disinvestment, helping you understand how to choose the right exit strategy.

Situations Where You Could Consider Exiting a Mutual Fund

You might want to exit a mutual fund in certain situations but need help figuring out how to. You might also often wonder when to withdraw money from mutual fund.

Hence, to help you out, here are some of the most common instances and what ways you could go for in those situations:

• Achieving Financial Goals and Profit Booking

When you've successfully achieved your financial goals or are nearing their fulfilment, it's crucial to have an exit strategy to secure your gains and manage risk.

This includes considering profit booking as part of your overall approach.

• Assess if you have met or exceeded your target, considering factors like time horizon, expected returns, and market conditions.
• If you still have a considerable timeframe, consider gradually transitioning from growth-oriented funds to more stable and income-focused funds.
• If you require regular income, you can set up a SWP (Systematic Withdrawal Plan) to withdraw a specific amount from your mutual fund investment regularly, ensuring a steady stream of cash flow while preserving the principal.
• If you have a lump sum to invest or are shifting funds from one scheme to another, utilise STP (Systematic Transfer Plan) to systematically transfer a predetermined amount from one mutual fund to another, aligning with your changing investment needs.
• Explore other investment avenues like fixed deposits, bonds, or real estate to diversify your holdings and reduce risk.

• Market Volatility and Risk Management

During periods of market volatility or when certain mutual funds face heightened risks, having a well-defined exit strategy becomes essential to protect your investments and mitigate potential losses.

• Evaluate the fund's performance over short-term, medium-term, and long-term periods to identify trends and consistency.
• Assess how the fund fares compared to its category peers and relevant benchmark indices to determine if it consistently lags.
• If a fund consistently underperforms over multiple periods and fails to deliver satisfactory returns, consider exiting the investment.
• Research and select funds with a similar investment objective but better track records and performance history to redirect your investments.

• Changing Investment Needs or Risk Tolerance

Over time, your investment needs and risk tolerance may change due to life events, financial goals, or shifting market conditions. Adapting your mutual fund portfolio accordingly becomes crucial to align with your evolving circ*mstances.

• Understand your changing circ*mstances, including financial goals, investment timeframes, and risk capacity.
• Review your current mutual fund holdings and determine if they match your risk appetite and investment goals.
• If your risk tolerance has changed, consider reallocating your investments to funds that align with your new risk profile.
• Utilise strategies like STP to systematically transfer funds from one scheme to another, ensuring a smooth transition while optimising returns.

• Change in Fund Attributes or Mandate

If the fundamental attributes of a mutual fund change, such as its investment style, portfolio composition, or underlying strategy, it may no longer align with your investment goals or preferences.

In such cases, considering an exit strategy is important.

• Stay informed about any changes in the mutual fund's prospectus or disclosures.
• Evaluate if the changes align with your investment objectives and risk tolerance.
• If the altered attributes no longer suit your preferences, it may be wise to exit the fund and explore alternatives that better align with your goals and preferences.