When you do you exit a well-performing mutual fund?

POSTED BY Free Financial Calculators ON June 14, 2012 7:41 pm COMMENTS (15)

When you do you exit a well-performing mutual fund? It is easy enough to recognize and exit a poorly performing fund.

What about the good ones? Say your goal is 15 years away and for the first five years one of your funds has returned year-on-year 25%. Do you redeem (say at least returns) and move it to safer investments? If you held on to the fund and suffered a loss in the 6th year and future years were bleak for funds (like last year) wont you lose out?

So When you do you exit a well-performing mutual fund?

15 replies on this article “When you do you exit a well-performing mutual fund?”

  1. Dear FFC (May I have the liberty to call you this way), I think the answer lies in the VIP – value investment plan. Here the investor is continuously tracking his portfolio & trying to stick to his 10% yly growth rate. If funds have performed, brilliantly there ‘ll be automated sell calls months after months. If the opposite is there, a huge money ‘ll be invested in buy calls.

    Here I assume this investor has that kind of bank balance to go for such volatile purchase or sell orders. For simplicity of the discussion I’m ignoring the impact of Taxation although it ‘ll play an important part.



    1. Yes that sound appealing. Taxation is as you mentioned quite a big factor. Like in everything in life its a trade-off. Thanks for all the replies. I feel this is something very important. Most blogs concentrate on starting investments. Exiting investments is also important.

  2. BanyanFA says:

    Probably what you are after is ‘Life Styling’. If your investor’s goal is approaching in next 5 years, you may want to start switching from high risk investments to low risk. For example, in your case if the duration is 15 years and you were investing 100% into Equity, you may want to do the following:

    0-5 years – 100% Equities
    7th year – 90% Equity – 10% Debt
    9th year – 80% Equity – 20% Debt
    10th year – 50% Equity – 50% Debt
    11th year – 40% Equity – 60% Debt
    12th year – 30% Equity – 70% Debt
    13th year – 20% Equity – 80% Debt
    15th year – 0% Equity – 100% Debt

    If you are into mutual funds, you can start the STP from Equity to Debt. This way you would smoothly transition from a top performing fund (though with high volatility in short run) into debt instruments offering low volatility.

    Does that answer your query ?

    1. Dear BFA,
      Thanks but no. I am not looking for that. I am well aware of what you are trying to say. The point I am trying to make is what if in years 6,7,8 equities returned something like -5% or say each year. If every fund in the marker returned least 10% lower than what I expected.

      Simply put what if what happen last year repeats this year and say twice in the near future. Would you not have been better off if you had exited ‘good funds’ while they were good!

      If I look at it in another way what do you do when you encounter a random situation which cannot be planned with simple assumptions. Please dont say it is unlikely. It is as good as saying I can predict the markets.

      My point is with debt the power of compounding is a nice clean scenario. With equities sometimes is plain random. Which is why people do Monte-Carlo simulations (coin toss calculations) to determine asset allocation

      1. Ramesh says:

        A chaotic system is inherently unpredictable on a daily/weekly/monthly/yearly basis.

        An absolute return calculator is better off not investing in equities (which is a chaotic system). The more you are factoring in fixed returns, the more you have to be away from equities.

        You cannot have equity-major investments and expect a minimum fixed return.

        It is a brownian movement, and you cannot expect the particle to move in only the north direction or the direction of gravity, etc. Also, since the last 3,4 years have been one particular way (say bull), the next year will be bullish or bearish cannot be predicted (like a true brownian movement).

        Another example, if there have been 10 heads in a row, the next time, the probability of head vs tail is still 1:1, and beyond that too 1:1.

        You cannot say, that you could have exited. You cannot drive by looking at the rear-view mirror. You have to look forward, and you make calls on that basis.

        Random situations cannot be planned with simple assumptions is a TRUE statement (not unlikely at all).

        1. Precisely! Hence the question: “When you do you exit a well-performing mutual fund?” 🙂
          Since you cannot drive looking back and dont whats up ahead it comes down to a coin toss!

          So MF investors who know nothing about direct equity must also behave like stock-investors. Make a call and hope it pays off. I find that very discomforting.

          So what we do will all those financial plans which assume 14% returns YOY. Maybe lets toss them all out, invest what we can (calculator or no calculator that is anyway one can do!) with a reasonable asset allocation and dance around with it. Sometimes you land on stone, sometimes in clay and sometimes in s**t.

          Now there is book which says: Retire Rich invest Rs. 40 a day. Do you know with what interest rate that no of Rs. 40 was arrived at? Could be good forum question!!

          1. Ramesh says:

            All plans (and people) who claim, who expect 14% returns YOY (linear) are impractical and plain non-sense.

            Expectation of 14-15% does not translate into a fixed 14-15% return. It can, but there is a possibility that it may not be. It can even be 20% for that matter.

            That book deals with a lot of other things also. The main idea is the idea of investing small amounts which with the power of compounding can give rich dividends (Though, I have not read it), but I like subramoney.com

  3. Dear Ramesh,

    Thank you for your response. What you are saying is clear but I am not quite sure it answers my question. By an unemotional investor I am referring to someone who doesn’t exit equities when sensex plunges continuously for a month.

    I am also assuming investing has been done with proper research wrt to fund style, track record etc. When all funds provided negative returns I would worry about the deviation wrt to rate of interest used in my original calculation rather than the benchmark. I am not interested in why the fund is suddenly performing bad. I am interested in when (if) to exit it when the going is good.

    Regarding shifting to debt, I have made it clear above that I am interested in the middle years. Exiting equities when you suddenly had a bumper year and reached your target is … well commonsense.

    An investor who invests 60% in equity, had a few good years and is staring at a couple of consecutive v. bad years, still a good many years from the goal is likely to think, ” Should have got out when the going was good”. Emotions aside, the interuption in compounding could hurt a lot since no is guaranteed of bumper years in future.

    So I am wondering if that is what one should: If my returns one year are significantly higher than what I calculated with, perhaps I can afford to shift (at least the extra amt) to debt.

    Perhaps interrupted compounding is the answer to erratic compounding. I will not idolize all those rosy power of compounding calculators (incl. mine!)

    1. Ramesh says:

      Can you provide a hypothetical example from the historical data, so that your concepts of bumper year are clearer.

      Returns one year are significantly higher than what I calculated with: need atleast one example of what are your assumptions of these calculations. Then we can think about them in a better manner.


      1. Well what I mean by a bumper year has nothing to do with my question. Anyway here are some bumper years: 73% bet. 31-3-05 and 31-3-6, 84% 03-04 etc.
        Anyway history is peppered with unique instances which will not repeat in the manner that it did.
        Say I calculate equity with 10% and I get each year:
        20%, 18%,15%,-20%,-5%.

        If I had gotten a large chunk out after 15% I am okay. If I wait till -5% I am then praying for goods years in future. If they do arrive, okay. If they dont, (no one can discount that possibility), my compounding is hurt badly.

        Maybe it makes sense to take out the excess (wrt 10% calculated) each good year. I dont know. Gotto run the numbers. Thanks

  4. Dear Mr. Jauhari,

    Thank you for your response. I have in mind an unemotional investor who is specifically investing for a goal with a well-defined asset allocation in mind. The ‘magic’ of erratic compounding that equities offer makes me (I am no expert and am in the early stages of investing for my goals) wonder if one can plan a goal with an asset allocation strategy fixed in stone.

    If I track annualized returns (which I hope is what an alert MF investor is expected to do) then the question is how many bad years can I take? The choices are clear if the goal is far away (stay invested) or near (shift to debt).

    I am not sure about what to do in the middle years. There is no guarantee that I will have enough good years (exceeding my original interest rate calculation) to cancel out the bad years. A large shift to debt in the middle even if it is close to calculated interest rates is also bad since the tax implications may affect the goal target adversely. I think it boils down to a gamble, an educated one at best.

    This is not about my risk appetite or how much loss I can handle emotionally. This is about how much interruption in compounding my portfolio can handle.

    1. Ramesh says:

      Unemotional investor = Does not exist.

      Anyways, the asset allocation strategy is probably the best “bet”.

      Tracking annualized returns, in isolation, is a bad way to assess a fund. A better way is to analyze the basic investing style (and whether that suits the investor) and the comparison with the benchmark of the fund. In short, relative returns as compared to its benchmark, rather than absolute returns. And if there is significant deviation from the benchmark, to find the reasons for that, if any.

      If the absolute goal is in near-future, say within 3-5 years, it is a prudent choice to shift to debt (say around 90%) and completely in the final year, provided you do have the total corpus related to that goal. If not, you do not have any choice except either to continue in equities (and take a gamble) or to trim down your goal corpus (or supplement it with loans, etc).

      Also, say your goal gets reached in the 4th year , then you shift to debt portion (80-90% depending upon the duration left) for that particular goal (which may be 11 years further away).

      Very short answer: if you reach your goal in 2-5-10 years, you shift to debt. If you do not reach your goals till 12 years through equity, you shift to debt and make other arrangements. In any case, you do not wait till 15 years in equity, to fetch the goal in the 16th year.

      I hope this is clear.

  5. Dear free financial calculators, if future years are bleak (although no way is there to know in advance), all funds ‘ll perform poorly. As this good performer has already done a good job in that so called 5Y time frame, the residual value ‘ll still be on a better side. Yes if some one is fearful for future years. One may opt for asset rebalancing as per original planning.



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