Mutual funds are normally a part of your long term financial plan. Therefore, disturbing your mutual portfolio means you are disturbing your plan. After all, when your SIPs are tagged to your financial goals, there is a sense of commitment to the entire process. But even in the midst of this commitment, there are some compelling circumstances when you must look to make changes to your MF portfolio. This includes exiting your current holdings and also infusing fresh funds into your portfolio. Here is how to go about it.
If the MF is tagged to a goal; and the goal is achieved
This applies to long term and medium term goals. You may have a 3 year debt fund SIP for your home loan margin. At that point, even if the bank offers you a personal loan, don’t fall for that temptation. Redeem the debt fund that was created specifically for the margin money. The same applies to your long term goals. Take the case of planning for your daughter’s education. When the goal post is reached, you must redeem these funds and pay for her college. It does not matter if an education loan is available because it takes away core discipline and creates a fresh liability. This is a valid case to change your MF portfolio.
You are stuck with laggards in your MF portfolio
This can happen with your best of efforts and research. Occasional underperformance is perfectly understandable but you must look for consistency. We are talking about funds that are consistently underperforming? When a fund continues to underperform the benchmark and the peer group for 3-4 years in succession (quarter after quarter), something is fundamentally wrong. It is time to think with your feet.
When asset prices underline the need to rebalance your MF portfolio
Normally, the financial plan begins with strategic asset allocation wherein your mix of equity, debt, liquids and gold is determined. Let us say, your original allocation to equity is 60% but the bull rally in the Nifty has taken the share of equities to 75%. The answer is to wind down on equity holdings and re-allocate to debt and liquids. The same applies to debt also when interest rates have already fallen sharply. This may call for underplaying debt and overplaying equity in your portfolio. When the asset allocations diverge substantially from your target asset allocation, it is time to rebalance your mutual fund portfolio. Here, changes to your mutual fund portfolio are perfectly legitimate.
New fund objectives or new fund team is making you uncomfortable
These are very specific reasons for making changes to your mutual fund portfolio. For example, you may be invested in a large cap fund but the fund may change its objective to become a multi-cap fund. You may feel that it does not suit your risk appetite. In such cases, you can use the exit window offered by the fund and shift to the large cap fund of another AMC. The fund management team makes a big difference to a fund’s performance. You may be comfortable with the combination of the current CEO / CIO / Fund managers. What if there is a change? It could be either because the team has left en masse, or because the fund has been taken over. If you are not comfortable with the new team, you have a choice to exit the fund and reallocate to a new fund with similar characteristics.
Expected macro changes could also trigger a shift in your MF portfolio
This could be true for debt or equity. For example, the sub-prime crisis in 2007 was a clear trigger for investors to substantially reduce their exposure to equities. While the core plan need not be meddled with too much, the satellite portfolio can surely reduce its equity exposure substantially. Similarly, the government commitment to lower rates is a clear signal to increase weightage on long duration portfolio. This may be a slightly active approach but it works in such exceptional circumstances. The same applies to you gold fund exposure, when the global uncertainty is high.
The moral of the story is that any of the above factors can be a key trigger for you to exit your mutual fund and re-allocate to a different story. Mutual funds are for the long term but there is nothing sacrosanct about it. If the situation demands and if the benefits of the shift outweigh the costs, then mutual fund shifting is absolutely par for the course.