If you have been following the news closely over the last couple of months, your investments in mutual funds might have left you jittery. In latest developments, Securities & Exchange Board of India (SEBI) has canceled the registration of Sahara Mutual Fund. The board has asked the fund house to stop taking fresh investments and sell its assets to another asset management company (AMC) in the next six months. Further, if the company fails to do that in the next five months, it will have to compulsorily redeem the investments to its investors.
What it means for the investors
Although the fund house is managing just Rs 136 crore, its tax saving fund, Sahara Tax Gain, has assets worth Rs 10 crore. There are three other funds (Sahara Banking and Financial Services fund, Sahara Wealth Plus fund and Sahara Midcap Fund) that have assets of about Rs 10 crore each. If you are one of the investors, don’t fret; nothing will happen to your investments. Your money is completely safe with the fund house. Either the assets of the fund house will be bought by some other AMC for managing or the fund house will give the money back to investors, if it fails to find a buyer. You can redeem your investments on your own if you don’t want to wait out for these six months.
This is one of the special situations which should trigger exit by an investor; there are other reasons when the investor should exit a fund.
Reasons when a person should exit from a fund
- Consistently poor performance
The first and foremost reason to exit a fund should be the performance of the fund. Temporary shortfall in the performance shouldn’t bother a long-term investor, but if the fund is underperforming significantly over a longer period of time and you don’t see a recovery in near future, it’s better you exit that fund.
- Change in mandate
You invest in a fund only when you agree with the mandate of the fund. Suppose, you have invested in a large-cap fund, you will expect it to always invest in large-cap stocks. If the fund changes its mandate to make scope for investment into mid- and small-cap stocks, you may exit the fund if you are not comfortable with the change in the mandate of the fund as it might also disrupt your portfolio composition.
- Achievement of the goal
You invest in a fund with a specific goal in mind. Suppose you invested in a mutual fund for creating a corpus for your child’s education. If your child is ready for higher education, you will have to redeem your investments. However, the ideal way is to start exiting from equity investments two to three years before you are about to reach your goal and investing the amount in safe debt investments, such as bank fixed deposits, in order to avoid a sudden fall in the value of the investments due to equity market fluctuations.
- Portfolio rebalancing
Sometime to maintain the debt-equity ratio at a certain level you might have to exit from a fund. Asset classes perform differently over different time periods. So, you will have to sell the better performing asset to invest more in the underperforming asset class to maintain the debt- equity ratio.
- Change in fund management
This should not result into an immediate exit from the fund but investors should remain watchful of the performance of the fund. In case, the performance of the fund deteriorates after the exit of the fund manager, you should consider exiting out the fund.
