An Exit Plan For Your MF Investments.

It is always a good time to invest in mutual funds. However, when it comes to exit; you need to plan it to ensure a prudent and tax-efficient exit.

When it comes to investing; it is always a good time to start investments as long as you have planned a time frame for your investments. The same is not true when it comes to exiting an investment. Let us understand why exiting a mutual fund investment needs to be planned. Suppose you had started investing in April 2015 for a 5 year time frame to exit in March 2020: you would have started investing when the S&P BSE Sensex was 27011 and exited when it was 29468; an absolute gain of 9 per cent in five years (before accounting for taxes on your gains), which would have been disheartening.

In the same example, if you had exited the investments in January 2020, when the S&P BSE Sensex was 40723; the same investments would have gained by 50 per cent. Proper planning for exit from your investment can ensure you exit at the time right for your goals or plans with preferably highest possible returns at that point of time. The data chosen in hindsight in case of the above example makes the case for an exit plan.

In reality, just the way you cannot time the entry when investing; you cannot find the perfect time to exit your mutual fund investment which would be right across the board for all investors. The idea is to find a point in time that is right for you and your investments. This is why planning an exit from your investments is so important.

Just the way SIP investments over the long term works favourably for your investments, adopting a few exit strategies can do the same by extracting the best from your investments. Let us explore three exit strategies which would go a long way to ensure you make the most from your mutual fund investments.

We all know that asset allocation is the bedrock of successful investing, which also calls for periodic asset rebalancing. A regular asset rebalance is one of the most desired investment strategies by the fund scheme. It is equally important to rebalance the allocation from time-to-time to maintain the original asset allocation proportion. Asset rebalancing evens out investment returns and forces you to ‘sell high’ and ‘buy low.’

For example, at the beginning of the year you split ?100 with ?70 allocated to equities and ?30 to debt. Now, if at the end of the year, the value of equity investments becomes ?90 and debt becomes ?35, the allocation shifts from the 70 to 30; equity to debt ratio you had started with. To bring back the equilibrium, you need to sell some of your equity holdings and invest the same in debt to get back the original balance. Actually you will need to reduce equities to ?87.5 and increase debt to ?37.5 to rebalance the portfolio to the original allocation of 70 to 30; equity to debt ratio.

When you commence investing, you do so by selecting an asset allocation that suits your financial goal as well as risk profile. The allocation in different fund schemes over time chart varying paths – some lose, while some gain, offsetting the asset allocation with which you started. To bring them back to the level you started with, you need a suitable exit strategy by redeeming units from some fund schemes and investing in some others.

You may rebalance your investment portfolio once a year or consider setting triggers such as 10 or 15% variation to the allocation before you act in case of long-term financial goals. You may also use changing stock market, economic conditions or your life stage to consider rebalancing your portfolio holdings.

Goal-based mutual fund investing works exceedingly well for investors through SIPs. While investing through SIPs is convenient, it should not set in complacency among investors to ignore the progress made by their investments towards their desired financial goals. For instance, as can be seen from the graph (Monthly SIP S&P BSE Sensex) there are instances when the markets fall for sustained periods impacting the investments made towards financial goals that are timed for these phases. A 20 per cent drop in investments can impact the best of investors’ financial plans if the fall occurs closer to the year when they need the money.

Suppose you were investing to create ?20 lakh corpus for your daughter’s education in 2027 and started investing for the same in 2015 with monthly SIP of ?7,175 from 2015 in a fund scheme that on average earns 10% returns. However, we know that it may not be possible to earn a constant 10% return over the 12 year investment time frame in this case, which is why you need to keep track of your investment.

So, in 2020; if the investment is on track and assuming it earns 10% returns, the value of investments would be ?5.6 lakh; but it could also be lower or higher, depending on the actual fund performance. With the way the markets are faring at present, the worth of investments which were on track may be just off it for now. As you still have another 7 years to go for the goal; you need to stay invested. However, if a similar goal was set by a parent to have the money in 2020; chances are the way investments have dipped currently, the target sum would not have been possible.

One exit strategy as you approach your financial goal would be to start transferring or withdrawing your investments from a year or more before the goal is set for. Such a move could be automatically earmarked preferably a couple of years in advance to the financial goal towards which the investments are being made by initiating an STP (Systematic Transfer Plan) or SWP (Systematic Withdrawal Plan). The importance of such an approach could be understood from the fact that while your financial goal to retire or purchase a house could be deferred by a couple years, the same cannot be the case for goals such as child’s education.

Lastly, there are opportunities that arise in the market when you could exit because market gains and losses can be explained. For instance, there could be economic and market conditions that may present the opportunity to book profits, even though your investment goal could be sometime in the future. For instance, a surge in the S&P BSE Sensex to touch 41000 levels calls for rebalancing to the original asset allocation, by booking profits in equities and investing them into debt.

Profit booking could be also used to exit certain poor performing investments during a market surge, as even poor performers tend to do better than what they have done in the past at such times. You could time the redemption of your investments at such circumstances to your advantage. Remember, profit booking will work the best when you have a clear plan to deploy the gains. You could use the gains to be redeployed at a later opportune time. Profit booking could also be used to rebalance your portfolio and the booked profits deployed to go back to the original asset allocation that you started investing with.

As an investor you should have an exit plan because having one will make you actively view your investments and financial goals and act accordingly. You can also avoid staying invested even when your financial goals have been achieved before time. Likewise, you also get away from the trap of emotional attachment to investments and exit the under performers than wait for miracles. Start today with a broad exit plan for each of your financial goal or investments and apply the exit strategy as a healthy investment practice.