Mutual funds are one of the most diverse options to invest across various investment avenues. Thanks to all the different mutual fund categories and low entry barriers, there is a mutual fund scheme for every financial objective and risk appetite.

But while the internet is filled with topics related to mutual fund selection and how to start investing in mutual funds, the exit strategy is seldom discussed. After all, what good is a top-performing scheme when you’re clueless about when to redeem your investment?

So, let’s take a look at when to sell mutual funds and what the scenarios are when it makes sense to exit the investment-

When to Redeem Mutual Funds?

Open-ended mutual funds, except ELSS, offer the flexibility to redeem your investment as required. With ELSS, there is a lock-in period of 3 years. But what is the right time to exit a mutual fund investment? Here are some scenarios when you can consider selling your mutual fund units-

Click Here to know the what are ELSS Funds?

• Achieving Investment Goals

  Investors generally have a financial goal they want to achieve with their mutual fund investment. Most such investors consider redeeming the investment once the objective is achieved.
  
  For instance, you might have invested in mutual funds to purchase a new car. So, once the required corpus is ready, you can consider selling the fund.

  Pro Tip Always re-evaluate your financial goals before redeeming your funds. Sometimes, your financial goals may have changed or evolved.

   

• Consistent Scheme Underperformance

  Investors closely analyze the past performance of a scheme before investing. But while the track record provides an idea about scheme performance across market cycles, it is not indicative of future results. So, it is possible for the scheme you’ve selected to underperform after you invest.
  
  While you should give adequate time for the scheme to deliver the expected results, you can sell a mutual fund if it has been consistently underperforming for more than 3 to 4 quarters, especially when other schemes from the same category are doing much better.

  Pro Tip While checking the fund's performance, make sure you have checked its past history. In addition, checking the fund against its benchmark indexes is crucial when evaluating funds for consistent underperformance.

• Changes to Mutual Fund Objectives

  Every mutual fund scheme has an objective based on which fund managers make investment decisions. This is also why it is recommended that investors should check the scheme's objective and match it to their investment goals before investing.
  
  However, fund houses do have the option to make changes to scheme objectives after-

  • Taking due approval from SEBI

  • Sending written communication about the proposed change to every unitholder

  • Providing investors with a 30-day exit window where they can redeem their investment at the current NAV without any exit load

  In some cases, the updated scheme objective may not align with your investment goals. So, you can consider selling mutual funds in such a scenario. But don’t forget to consider the tax implications of such pre-mature redemptions.

  Pro Tip Try to understand the reason for the change in mutual fund objectives. At times such decisions are made by fund managers if they no longer see the promise in the earlier investment objectives, as the market and economic scenarios may have changed.

• Fund Manager Changes

  The fund managers are responsible for making the investment decision on behalf of all the investors. Therefore, experts often advise investors to check the track record of a fund manager before investing in a scheme managed by them.
  
  However, it is not uncommon for fund houses to change the fund managers of their schemes. If the fund manager of a scheme you’ve invested in is changed and it has negatively impacted scheme performance, you can consider redeeming your investment.

  Pro Tip While short-term volatilities are inevitable, especially when the fund manager has been changed, that alone should not be the decision to redeem your mutual fund. Check for the credibility and past performance of the new fund manager before making a decision.

• Change in Repo Rates (For Debt Funds)

  The RBI is responsible for fixing the repo rate, which is the rate at which it lends money to commercial banks. Debt mutual funds generally perform better when the repo rate is slashed and deliver lower returns when the rate increases.
  
  If you’ve invested in debt funds and the RBI has increased the repo rate, it can make sense to redeem your investment. But rather than treating a single instance as a signal to exit debt fund investment, focus on the overall repo rate trend. If the repo rate is consistently rising, you can think about exiting and switching to another fund category.

  Pro Tip Just as equities have cycles of ups and downs, interest rates also move cyclically. Thus, an increase or decrease in the interest rate should not be the only decision criterion. Moreover, consider investing through SIPs which average out your acquisition cost helping you tide through short-term interest volatilities. Click Here to know what is sip?

To Exit or Not to Exit?

Knowing when to redeem mutual funds is as important as knowing where and when to invest. As mutual funds like equity schemes are directly linked to the stock market, some volatility, correction, and dips are common. In fact, several investors use them as an opportunity to invest more.

However, scenarios like the ones listed above require careful analysis and planning. It can sometimes make more sense to redeem the units rather than hope the scheme will bounce back within a short period.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.