Mutual Funds

Strategy to adopt while withdrawing money from mutual fund

Most of us can quickly determine when to invest, where to invest, and how to invest, but many fail to understand when to exit from investments. Often people talk of the right time to invest, but we haven’t really seen anyone talking about the right time to exit. Also, people tend to get impulsive with their investment decision. For example, every time there’s some profit, people think of withdrawing or every time whenever there’s a little loss after a streak of gains, people tend to withdraw. But this ain’t the strategy to withdraw money and also it is not the advisable one.

As investors, we should understand one thing very clearly that we all have some objective or goal in mind because of which we choose to invest. This goal can be anything – right from buying a phone to buying a yacht or going on a vacation. So, along with the purpose, having an exit strategy for each of such goals help ensure that the goal is met and doesn’t remain unfulfilled.

The dis-investment plan is important

We have always heard everyone saying that an investor should remain invested for the long-term to make wealth. Also, we have listened to people speaking – With a longer horizon; the returns are better owing to compounding. While these statements make absolute sense, it is essential to have a dis-investment plan because money accumulated needs to be used somewhere at some point, and for that withdrawal is necessary.

Let us see the chart of Sensex for the past five years. The money you invested in 2013 would have fetched your higher returns if you would have remained invested and not exited during 2016. Similarly, in 2018 – Jan was better than December, but if you hold a little longer, returns further increases in 2019.

BSE Sensex Chart
Source: BSE India

Based on the graph, we can see that holding a little longer could impact adversely, too, as there are no guaranteed returns in equity.

The chart makes you nervous, and you must be wondering markets are risky and volatile, and you shouldn’t participate. But, before concluding, have a closer look, and you shall find a lack of exit strategy.

Withdraw when closer to the goal

When you are investing for an objective, say children’s education expenses, and your target is Rs 10 Lakhs. When you are closer to the goal, say Rs 9 Lakhs, you should start withdrawing your money and park it in safe heavens such as liquid funds or even fixed deposits.

Let us see this with an example –

Assume you are investing Rs 10000 per month for five years. You start in 2011 as you need to make payment of education fees of your child in one go of Rs 8 Lakhs in December 2016.

Now, consider the scenario where your fund has given you average returns of 11% per annum and helped you accumulate 6.2 Lakhs by June 2016. Rs 6.2 lakhs account for 80% of the corpus you need. If you do not safeguard the capital, you may end up busting.

How?

Do you recall, November 8, 2016? Demonetization was announced, and the market crashed where the indices corrected in double digits. If you were greedy and remain invested, you would not be able to provide for the fees. But if you would have started withdrawing systematically six months before December 2016, you would have protected 80-85% of the target amount.

So when should you start withdrawing?

Ideally, from 9-12 months before you need the money, you should start withdrawing the investment.

How should you withdraw?

You should not withdraw your investments in one go as you may lose the opportunity to make returns. Thus, it is advisable to opt for a Systematic Withdrawal Plan (SWP) or Systematic Transfer Plan (STP).

SWP or STP allows you to take out the money in a systematic fashion over a period. This way, you will be able to park your money in a safer fund that has low volatility, such as a debt fund or a money market fund. The idea here is to cash out your wealth in a phased manner to safer heaven.

Know when to exit

Many times it happens that you need to exit your investments before the goal is achieved. In these scenarios, exiting the investment is suggested only when:

  • Emergency – Should there be any financial emergency and your emergency fund isn’t sufficient to meet the requirement, you may consider liquidating your investments.
  • Team change in the fund – It goes on without saying that we invest our money on the fund manager and his style of investing. Thus, the significant portion of the fund’s performance is dependent on the fund manager’s ability to manage the funds in a volatile situation. As long as there is no change in the fund manager, an investor need not worry. But it is advisable to keep an eye on the performance of the fund, and churning.
  • A fundamental change in the fund – An investor invests in a fund because of his risk alignment with that of the fund. So if the objective of the fund and the strategy to invest changes, an investor should be cautious and may exit if things are not favorable.
  • Underperformance – Mutual funds are subjected to market risk, and thus, the performance may not sustain every day/month/quarter/year. There will always be some level of volatility. A fund should not be evaluated from short-term metrics but should be considered based on the long-term parameters. If you see that the performance of the fund has been volatility and the fund is underperforming its peers and benchmark consistently over a period, you may choose to exit the investment.
  • Portfolio rebalancing – Aligning the investments with risk appetite and financial objective is the key to success. So, if you start with some asset allocation composition, try to hold on to the same or adjust based on the age/horizon and risk appetite. Allocation to one asset class may change due to better performance than others. For example, if you start with a balanced portfolio of 50% in equity and 50% in debt, it may change to 60:40 ratio in a few months or years as equity grows faster than debt and takes a more significant portion of the pie. Thus, you must review your portfolio in a timely manner and make a full or partial exit from the investments to balance the portfolio. For portfolio review and rebalancing, you may always reach out to Tarrakki. Download our app and get access to the tech-enabled solution for investments.

If the above are not the reasons, you should always hold onto your investment and see it growing provided you believe it is fundamentally sound.

Conclusion

We believe withdrawing money from a fund or a basket of funds should be well planned. Every individual tends to achieve a goal or financial objective with the help of mutual funds, and thus the exit route must be well thought of. When you see the wealth accumulated accounts for a sizeable portion of your goal, one should not be greedy and instead, try to protect the accumulated wealth so that by the time the money is needed, the investor is having the cash intact. Lastly, always have an exit strategy ready for investments as it is challenging to be accurate always while entering and exiting the market.

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