Most common situations that are seen:
1. One making losses and not comfortable,
2. One urgently need money to invest in real estate,
3. One running short of money. So can’t afford SIPs,
4. Markets are too high. One will resume SIPs after sometime.
This is given the goal based savings framework that CFPs recommend, over a long period of time. Now, every person has a unique situation but here are some generic guidelines when one can consider liquidating MFs:
About two years before the maturity of one’s goal, one should start moving from Equity MF to Debt MF. Idea is to protect the goal from the short term fluctuations in the equity market. Technically, one is not liquidating investments but shifting from Equity MF to Debt MF. When the goal actually is due, one can sell the Debt MFs and achieve the goal. One should carefully review the latest situation and cash flows and take a judgement call before the goal is to mature. The goal for son’s education may need an investor to pay at every term at 6 months interval over two years and not all upfront. The income may have gone up and the monthly surplus could be sufficient to take care of the yearly payments for the said goal. In that case, one may just continue the Equity MF investment for other long term goals like say retirement.
Fund is not performing well
The financial planners normally suggest to wait for couple of quarters and if the fund continues to poorly perform then it may be a good idea to shift the investments to a better performing fund. A mistake observed here is to sell the non-performing fund but not investing the proceeds to an alternate good performing fund. How does one conclude that fund is not doing well? One will observe that every good performing fund, over a long period of time, goes through the cycle of performance and does not beat the benchmark for few quarters, in between. So, it is important to have a conviction in the fund and not exit at the first instance of underperformance. One good way is to watch how the fund has performed relatively. A quartile methodology can be quiet useful here. Like in a forced ranking method, here the funds are categorized in to 1st, 2nd, 3rd and 4th quartile based on their performance. Best performing funds are in the 1st Quartile and the worst performing funds are in the last quartile. If one’s fund is consistently performing poor on leading indicators for say 4 to 6 quarters, then it may be an exit call. How to know the performance of one’s funds? There are many websites which rank MFs based on their performance and risk behaviour. As a popular option, one can check valueresearchonline.com, moneycontrol.com or morningstar.in
Goals, needs or savings have changed
If an investor wants his Son to study a two year MS in North Eastern University in Boston and starts saving 10 years before. Now, he realizes that given the son’s level of academics, he may get a decent scholarship so may not need the 100% funding from one side. If this does not come through then there is option of him or the son taking a bank loan. So now, one can reduce or avoid the monthly SIP for this particular goal. In a situation like this, when one notices that one no longer need to save for the particular goal, then it’s time to revisit your overall goals and see if the monthly SIP budget can be diverted for any other goal. Sometimes one may consistently face a cash flow crunch for various reasons. It may be a good idea to revisit the original assumptions of surplus income and see if there is anything one can do to improve the surplus levels. If one assess that this is a temporary situation and one may resume SIPs post say three months, then it’s a good idea to stop the SIPs but also setup new SIPs starting three months later, right away. Similarly, risk appetite can change over a period of time. So one may need to tone down the aggression in the MF portfolio and move from say Mid or Small Cap to Large Cap Funds or move from Large and Mid Cap to Hybrid Equity Aggressive Funds.
Asset Allocation – Portfolio Rebalancing
Now, this is the wisdom our grandparents shared decades ago. Don’t keep all your eggs in one basket, they suggested. To achieve a reasonable Return On Investment (RoI) over a long period of time, a focus on asset allocation will be a key determinant. One’s ability to move in and out of the relevant asset class at the right time will contribute significantly to one’s portfolio performance. So when one sees that markets have gone up very high, revisit one’s asset allocation and see if that needs re-balancing. How does one determine an ideal asset allocation? This is a separate discussion but in brief, we can say that this is linked to one’s goals, risk profile and financial health. Based on such parameters, one may need an Aggressive, Balanced or Conservative asset allocation.
Just as it may not be a good idea to hold on to a fund because it’s less than a year and one will pay taxes, it may not be a good idea to sell fund now that it’s more than a year and long term gain is zero. It is suggested that tax should be one of the consideration but not the major focus of one’s investment decisions. Staying invested over a long term in Equity MF is a key to growing one’s wealth.
So to conclude, an investor should watch his or her goals and asset allocation. They should see if the situation has changed. It’s not necessary to sell funds just because markets have gone up. But one can leverage such a situation to liquidate non-performing funds from the portfolio and move the investments to better funds.
This article was originally published on Moneycontrol.com
The author can be reached at firstname.lastname@example.org