When to exit a mutual fund?

POSTED BY Abhishek ON November 19, 2012 9:56 pm COMMENTS (15)

 

I have a very basic question – when to exit a mutual fund (apart from when it is not performing good)? Does it also depend upon type of fund i.e. debt or equity? 

 

Consider my case, I have been investing in an mid cap equity fund via SIP from the past 1  year. The sensex in the past 1 year has moved from 15000-18500 (for the sake of simplicty) and my fund NAV has moved from 45-53. From the past 3-4 months, the NAV is fluctuating between 52-53. The fund has definitely given me a good return in past 1 year. Though my investment goal is 5-7 years but I fear that the market will go down and so does my fund value and my profit. Moreover, I also fear that if I keep on investing in this fund, my average cost would go down and my returns would decrease. 

 

What shoud I do? Should I stay invested and keep on investing even if the market goes down and NAV decreases or sell this fund and invest in debt fund?

 

One more thing, how long can I stay invested in a fund after I stop paying SIP?

 

15 replies on this article “When to exit a mutual fund?”

  1. Ramesh says:

    @ TheZionView

    I was wrong in thinking that the basis date of SIP means that exit load is considered on the basis of the start date. The basis date just means that the exit load considerations will be applicable as per the registration date, meaning if the fund changes its exit load criteria later on, the SIP will still bear the exit load criteria based on the date of start of the SIP.

    You were right in saying that each SIP has its own set of exit load time frame. I am sorry.

    Ramesh

  2. TheZionView says:

    Ramesh

    No a 12 SIP of 1000 a month at jan 2012 will not be considered same as Lumpsum of 12000 at jan 2012.

    It does not work like that.This is the reason why i said Each Purchase through SIP is considered separate purchase.

    A SIP is just a route offered by AMC to help investors do a regular investment. It does not change the exit load criteria.

    For example i am pasting QLET exit load criteria below .You can see they mention “from date of allotment” you will not be allotted the units until you purchase it .Which means your Feb2012 SIP units will be allotted only in Feb and will have the Exit load of 3% applicable if taken out on Jan 2013

    Exit Load/Switch Out Load:
    – within 6 months from the date of allotment 4.00%
    – after 6 months but within 12 months from the date of allotment 3.00%
    – after 12 months but within 18 months from the date of allotment 2.00%
    – after 18 months but within 24 months from the date of allotment 1.00%
    – after 24 months from the date of allotment Nil

  3. TheZionView says:

    @ahmad

    Each individual SIP is a separate purchase. So it it accounted for each SIP.
    Meaning the first SIP will have no exit after 12 months and second SIP on 13th month,third on 14th months and so on.

    1. Ramesh says:

      That is incorrect for normal equity funds.

      For ELSS, that is applicable in terms of 3 years, but not for non-elss funds. But it is always better to check with the particular fund’s offer document.

      1. Ramesh

        Then how does it work for non-equity funds then ? if i have 5k sip for 18 months and then i sell 50% units ?

        1. Ramesh says:

          Sorry, I am not sure about them and I could not find the relevant info too in the KIM or other documents.

          Could you please contact 1 or 2 of the relations managers of AMCs to find out the details regarding these? Thanks.

          1. From what I understand and know . The units sold are considered as FIFO , means first in first out , so when you sell , it will be assumed that you are selling the units which you sold first, which is the oldest one . Hence in the 18 months example I gave , the units which i bought for first 6 months (which completed 1 yr) will not have any exit load and rest 3 months worth of units will be having exit load .

            Assumption is that the number of units bought each month was EQUAL 😉

      2. TheZionView says:

        @ramesh
        Please check before saying something is incorrect.

        I have personally withdrawn from equity fund based on above calculations. The Captial Gain calculation and mutual fund purchase and redemption works on FIFO(First in First Out) basis.

        For reference
        http://www.valueresearchonline.com/story/h2_storyView.asp?str=10894
        http://www.valueresearchonline.com/story/h2_storyView.asp?str=10894

        1. Ramesh says:

          I have checked and only then I said that.

          For Exit Load purposes and NOT for Capital Gains calculation: An SIP is considered as a single investment amount for all purposes, which is just paid in installments. This means if you apply for SIP of Rs 1000 for 12 months on Jan 1 2012, it will be considered at par with a lumpsum amount of 12,000 on Jan 1 2012 and will also get deducted Rs 150/100 as the case maybe if it is a first investment / already invested fund respectively. If you will withdraw the units on Jan 1 2013, you will not get any exit load (provided the exit load is exempt above 1 year, as is in most equity funds).

          From your point of view, if the fund is withdrawn on Jan 1 2013, the first investment amount units of Jan 1 2012 will be exempt, but all others will incur an exit load. I disagree with that.

          I hope I have clarified the issue.

          FIFO is a different thing, and is applicable for staggered non-SIP lumpsum investments (as is seen in the VRO article you mentioned).

          I agree, I may be wrong in interpreting things, so it will be best to check this with the relevant MF relations officer. This much is clear, one of us is incorrect.

          Caveats:
          1. I am not sure about the capital gains calculations, but mostly that should be in par with the normal SIP investment protocol of calculating everything as on the basis date.
          2. The ELSS investment, as I have mentioned above, lumpsum and SIP are locked for a minimum of 3 years.
          3. I have not checked this about debt funds or for SWP/STP.

  4. Ahmad Zaib says:

    Nicely explained Manish!

    Also I have one more doubt. Suppose I am investing through SIPs in a MF, so does the exit load count from the first investment date or the last SIP date?

    Kindly clarify.

    1. Ramesh says:

      The basis date which means the date of first SIP.

  5. I can see that you are concerned about the good profit you have got in short term and now your focus is all on “How to lock in this excellent profit” and not loose in in future.

    If you had expected 12% overall in a year and you got 20% , now you are anchored to this 20% and do not want to go back to same old boring 12% kind of return . thats something one can understand , but more than this , you need to focus on your long term goal still .

    Just imagine what can go wrong if you withdraw your money fully

    1. You might not take action later to reinvest when markets are a little down and never do it waiting for the perfect moment .

    2. The markets might take a sudden big turn and your NAV might shoot up .

    So I would say , its more of a mental game right now .

    Rather than looking at the absolute return , look at how much you have fared against your required return for reach your long term goal . Playing the boring game !

    Manish

    1. Abhishek says:

      Thanks Manish. This is just what I was looking for.

      1. Abhishek says:

        I mean this is exactly what I was looking for 🙂

  6. Vikash says:

    Well, IMO – One should never exit any MF until 1> you need money urgently for some unavoidable reason. 2> To fulfill your goal/commitment 3> To pre-pay your Loan amount.

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