Whenever the equity market reaches all-time highs, many investors tend to sell their equity mutual fund units to book profit and then wait on the sidelines for an attractive entry point. Does this strategy of buying low and selling high make sense for equity mutual fund investors? Read on to know…

Defying all odds, the Indian equity market witnessed positive momentum between April-June 2023. At the end of June 2023, a sustained bull run took the S&P BSE Sensex above the 64,000 mark for the first time. The index closed at a record high of 64,719 as of June 30, 2023, while the Nifty 50 index too topped the 19,000 mark to end the month at a fresh high of 19,189. Click here to know the factors driving the equity market to an all-time high.

The extended bull run in Sensex and Nifty has brought immense cheer to investors in equity mutual funds. However, it is important to note that after the strong market rally, valuations appear to be rich and the margin of safety has narrowed. This means that if economic growth and corporate earnings do not sustain in a healthy way, the equity market may witness a high drawdown.

Does this mean it is time to sell your equity mutual fund units?

Well, the answer may vary for every individual investor based on their investment objectives. While the traditional wisdom recommends buying low and selling high, the strategy is more suited for traders, and not for investors.

If an investor’s time horizon to financial goal is at least 5 years away, such as children’s higher education/wedding, retirement needs, buying a house, etc., the short-term movement in the equity market should not affect their investment decisions.

For such investors, staying invested in equity mutual funds even during market highs allows their wealth to grow and compound wealth, and thereby takes them nearer to their envisioned goal. On the other hand, if investors redeem their equity mutual fund investment only to re-enter at a lower level later, they may miss out on future gains. This can create a hurdle in their wealth creation process.

Timing the market is futile, especially for those investing for the long term. No one can accurately predict if the market has bottomed out after a correction, or whether it will keep rising after reaching a peak. So, there is a high probability that investors’ bets may not pay off as expected. Thus, long term investors should not be affected by market peaks and troughs.

[Read: Do You Invest in Mutual Funds with the Mind of a Trader?]

Investors may consider selling their investments only under the following circumstances:

1. When the goal is nearing

If the goal for which investors have invested is less than 3 years away, it is time to gradually trim allocation in equity mutual funds and shift to less risky avenues such as safely-managed debt mutual funds and/or bank deposits. This will protect the corpus from any potential sharp correction at the end of the goal period.

2. When investors have achieved the desired corpus

investors who have been investing regularly through market highs and lows would have likely accumulated a sizeable amount over a period and fulfilled their goals. Such investors may consider booking profits to protect the capital from market uncertainties and volatility.

3. Change in fundamental attributes of the mutual fund scheme

At times, the fundamental attributes of a mutual fund scheme may undergo changes, such as a change in control at the AMC level, change in investment philosophy/strategy/style of the scheme, change in scheme category, etc. Such changes can result in the scheme following a more aggressive/conservative approach and may no longer be in congruence with the investor’s risk profile and investment objective. In such a case, investors may consider selling their mutual fund units and invest in a scheme that aligns with their investment objective.

4. Consistent underperformance of the mutual fund scheme

At the time of periodic portfolio review, it is important to compare the performance of a mutual fund scheme with its peers and the benchmark. If the mutual fund scheme that the investors have invested in has consistently underperformed most of its peers and the benchmark across various market phases, then it may be time to redeem it and replace it with a better alternative. Do note that underperformance in the short term should not be a reason to sell a mutual fund scheme as the performance may improve in the future.

[Read: 5 Simple Steps to Perform a Mid-year Portfolio Review]

[Read: How to Analyse Your Mutual Fund Portfolio?]

5. Financial emergency

In case of a financial emergency or an unexpected rise in major expenses, investors may consider selling their equity mutual fund units as they are highly liquid. However, selling mutual funds should be seen as a last resort, and investors may first consider utilising the corpus parked in the form of an emergency fund.

6. Change in personal circumstances

An individual’s personal circumstances may undergo changes over the years. This may result in change in priorities which may induce investors to revisit their existing financial goals and investment approach. For instance, investors in their twenties may be willing to take high risk but they may be satisfied with safer avenues in their forties. If the new financial goals warrant a more aggressive or conservative approach then investors may consider selling their mutual fund units and replace them with a suitable alternative.

7. Rebalancing

Sharp movements in the equity market often lead to deviation in the investment portfolio from the set asset allocation. For instance, during a bull run, the equity allocation in the portfolio can breach the set limit, say it reaches 85% from the target allocation of 75%, and thereby make the portfolio riskier. In such a case, investors may consider trimming the allocation by selling a portion of their investment to bring it back to the original level.

[Read: Should You Rebalance Your Mutual Fund Portfolio Amid Expensive Equity Valuations?]

This article first appeared on PersonalFN here

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