When should you exit a bad mutual fund scheme?

When should you exit a mutual fund? If a scheme is not performing well, should it be exited? Such questions keep coming in the mind of many investors.

Most of the financial advisors advise to stay in the investment for a long time, even if there are sharp ups and downs in the market. However, in many cases it makes sense to exit a fund.  Lt’s see in which circumstances we should exit a scheme.

Keep an eye on events
Several events should be seen as red flags for any mutual fund portfolio. For example, if the managers of a fund are constantly changing. Then avoid investing in such funds. This indicates that the management of the fund is not efficient.

People in India generally trust the fund, often people do not pay attention to who is the manager. The truth is that investors should keep an eye on the news related to the change in the fund manager, because when a new fund manager comes, his investment style also changes. This can affect your returns.

If the performance of a fund is poor for one year, then it is also a red flag to invest. This can also happen due to the ups and downs in the stock market. Still, if this is the case, it is better to do research and take expert advice.

What is standard deviation
Another red flag for investing is high standard deviation. Standard deviation shows how much volatility can occur in a mutual fund. It also shows how far the scheme’s returns can deviate from its historical mean. Higher standard deviation means that the scheme will have higher volatility and lower standard deviation means that it will have lower volatility. An increasing standard deviation usually indicates that the fund’s performance is uneven. In such cases it is better to exit the fund. You can get information about standard deviation from websites like Value Research or any investment app.

Continuous poor performance
Another worrying factor is the consistent poor performance of a fund. If the fund is consistently performing poorly, then it would be wise to exit. If a fund is consistently underperforming compared to other similar funds, then it is a signal to get out of it. That is, instead of just looking at the performance of a fund in the market, it is also important to compare it with its peers.

Lastly, if some funds are not performing well, then it is better to make changes in your portfolio with the help of an advisor and exit them.

Goal achieved
Apart from this, you can exit the fund even if you feel that your goal has been achieved. In case of a 5-6% shortfall, so you can make up for it with liquid or debt funds. Usually, investors buy mutual funds only to meet their financial goals. So when the financial goal is achieved, such investors exit the fund.

For example, suppose you invest in a mutual fund with the goal of buying a house. So once you have the corpus that you need, you can exit your fund. Many investors create diversified portfolios to reduce risk and also want their potential returns to remain the same.

But the balance of the portfolio changes after a point of time, so investors should keep a constant eye on it. If you feel that some schemes are disturbing the balance of your portfolio, then it is better to exit them.

Profit not the only detrmining factor

One should not exit a fund just on the grounds that it is making a loss for you in the short term. Do not judge the performance of a mutual fund only on the basis of its low or high profits. While investing in any mutual fund, do consider your financial goals. If you want to exit a mutual fund, then see how it can affect your goal? If some funds are not able to meet their targets, it is always advisable to adjust your portfolio and exit such funds.

Ultimately, selling an investment is entirely your own decision. It is possible that someone may need money in an emergency, in such a situation selling units of the fund can be the only way out. But take a very careful decision about selling the units of the fund, because investing in mutual funds in the long term only gives good returns.