Comparing equities funds to other conventional investments like bank deposits and gold, SIP has repeatedly shown to be the more successful long-term investing strategy. Financial advisors frequently recommend starting an investment strategy as early in a person’s career as possible; however, because equity funds are subject to market-based risks, one cannot expect steady returns and instead, your mutual fund returns are impacted by market changes. 

The timing of selling equity fund units and re-entering the equity market should also be understood because SIPs are the best option for novice or first-time investors. Let’s examine five scenarios to decide when to sell your equity fund units in order to maximise your wealth and accomplish your financial goals.

When should you consider selling your equity fund shares?

A source from MNS said, “Honestly, there may be a number of reasons to sell funds. Let’s talk about a few situations. Every fund is established and run with a specific goal in mind, which could be an investing approach, a particular subject, or something else. Investors should absolutely think about selling the investment whenever the target is strayed from. Another possibility is that the sale might be taken into consideration if the fund manager changes.

Strong grounds for withdrawing from a fund include poor stock selection and fund performance. Additionally, macroeconomic factors like sluggish growth, high inflation, or unfavourable economic policies may be factors that investors should take into account when choosing equity funds.

“See the selling of any asset, including mutual funds, depends upon several variables for which you have made the investments,” said another source from MNS. Therefore, the time horizon won’t allow for any sales prior to retirement, for instance, if you have planned a SIP for retirement. In general, if you are investing with a short- to medium-term time horizon, you should only withdraw your money when you have a crystal-clear better investment opportunity.

Investors typically sell during recessions as a result of market cycles. However, it shouldn’t be the case. Take Covid as an illustration. The majority of the equities that were at 52-week or all-time lows in march of this year have rebounded and crossed back over their all-time highs. So, one must consider the long term and refrain from withdrawing funds unless they are absolutely necessary or there is an unquestionably superior investment opportunity ahead of them. See, there are many factors that affect selling.

“Down payment when purchasing a home, family wedding, greater investing opportunity, diversification into other asset classes, etc. could be the likely reasons for one to withdraw,” The main justifications for saving (health emergencies, education, down payments on homes), asset reallocation/diversification (purchasing real estate, gold, direct stocks, other MF for portfolio balancing), etc., should be the normal justifications for withdrawing. If the withdrawal is large enough, even the tax implications could reduce your overall profits.

 “Investment is always done with a specific purpose in mind. Equity investments may be able to assist us in achieving these objectives as they have a long history of offering some of the best inflation-adjusted returns of all asset types. This lengthy duration is crucial since equity is inherently volatile over short time periods. Investors may choose to sell their positions depending on a number of factors:

1. The money can be parked in a secure investment if the goal is attained or reached.

2. You can switch to less risky investing channels because your risk profile doesn’t match the prior investments you made.

3. Changing to a better organised or performer may be helpful when your fund has been underperforming for a while.

4. You require cash. This ought to be the very last choice. Since taking money out implies you’re interfering with compounding, Investments in equity should therefore be kept going for as long as possible.

There are five reasons to sell any stocks or equities funds you own.

“It is easy to claim that one has to buy low and sell high to earn money in the equity markets,” said Ram Kalyan Medury, the founder and CEO of Jama Wealth, an investment advising service that is registered with SEBI. Selling, however, is one of the most difficult choices one can make. Most individuals make a mistake. It makes sense that the average retail investor generates lower returns than the market as a whole, according to numerous research. Here are five justifications for selling any stocks or equities ETFs you may be holding.

1. The stock no longer complies to the fund manager’s or your chosen investment strategy. In our instance, we support Roots & Wings since it represents solid financial standing and rising profits. If a corporation does not satisfy these requirements, it is time to leave. Although there is some room for disagreement, the long rope has a finite length.

2.There are problems with corporate governance. The occasional occurrence of front-running or insider trading is not shocking. Give it a close look and err on the side of caution if it applies to something in your portfolio.

3.Your strategic reallocation of investments from equity to debt may be required by your rebalancing. This requires a sell action.

4.You might do a tactical reallocation and reduce your exposure to your stock if it has overextended itself. Sometimes selling small amounts may be necessary for intra-portfolio rebalancing.

5.You require the funds to support a major life event. To live a happy life is the goal of investment. Even while long-term investing is a requirement, stocks shouldn’t be held onto indefinitely.

An investment sale is a difficult process. Making the choice will be less difficult and painful if you follow some of these general guidelines. Assigning a cause for the choice also makes it easier to not regret it if it occasionally does not lead to the best outcomes. Selling an instrument is often likened to trimming a plant; both are required for creating a beautiful portfolio.

What selling tactics should you employ when reviewing your portfolio of equities funds annually?

Although it is of the utmost significance to be consistent with your investments in equities funds for the long run, one should know when to take an exit. There are a few situations to be on the lookout for.

To protect the corpus from any depletion caused by high equity market volatility, you should start switching from volatile equities investments to less hazardous debt funds as soon as you are closer to attaining your long-term goals, say within the next two years.

The second instance would be if you gradually become overweight in the stock asset class; at that point, it’s essential to assess your portfolio and rebalance it to minimise equity exposure in accordance with your risk tolerance and investment horizon. In order to protect their short-term objectives, investors can withdraw from equity funds based on expected future market conditions.

“At this time, the valuations of the Indian equity markets appear to be too high. The markets have skillfully recovered and reversed the whole YTD’CY22 drop. The Nifty is now up 5% year-to-date in 22. As a result of this surge, the Nifty currently trades at a P/E of 22x FY23E and a P/BV of 3.1x, both comfortably over the LPA, and it now has limited upside potential in the foreseeable future. According to the Buffet index, the markets are largely overvalued. 

According to CA Manish P. Hingar, India’s market cap to GDP is at 112%, higher than the long-term average of 79%.

“From a long-term view, equity markets appear promising, but there may be some corrections in the near future. Investors can partially liquidate their holdings to exercise greater caution when planning for immediate goals. Last but not least, if the plan in which you invested is drastically underperforming compared to its benchmark and category average. 

One ought to change to better-performing funds in such a situation. Having said that, it is not advised to be done frequently. One can decide to switch during the annual assessment of their portfolio of equity funds.

Should you sell your mutual fund units if a specific goal comes close?

As most experienced fund managers would tell you in stocks, buying the appropriate stock isn’t a skill that is particularly hard to come by; rather, it’s the ability of selling that calls for enormous knowledge. Does the same hold true for equity funds, though? Equity funds, as opposed to direct equities, are a vehicle more so for investors who lack the time or the necessary expertise to perform direct investing themselves and instead provide the money to a management to manage.

Before discussing selling in these situations, it is important to note that you should only purchase equity funds if your need for them is at least three years away, ideally five years or more. “In such cases, the decision to sell should be based primarily on the requirement of funds and/or a specific goal for which the investment was made that is approaching. Here, one crucial point to bear in mind is that, if the goal is known and certain, it would be prudent to gradually begin withdrawing money from stocks so that any changes in the market won’t jeopardise the possibility of achieving the goal.

For example, if you have been investing in stock funds to save for your child’s school for the previous ten years, you should begin methodically withdrawing from them when you are about 1/3 of the way to your goal in equal amounts. It goes without saying that this should be in line with your overall financial plan, according to Vivek Banka.

Scenarios on which mutual fund units should not be sold?

“Selling is a significant decision,” Epsilon Money Mart Pvt Ltd Co-Founder and CEO Abhishek Dev stated. It should therefore be handled carefully to avoid having your returns suffer. Selling during a bear market phase is not advised since you will sell when you should ideally be buying.

As a result, you are not only missing out on superior cost averaging but also giving up the chance of future investment opportunities with higher prospective returns. The current sideways market is an example of how the market can occasionally behave. Funds may also perform poorly during this period. Check the performance against the benchmark before selling. It might not be necessary to sell them if they compare favourably.

Selling equity funds should not be motivated by transient market sentiments like the one indicated above. Market and business cycles exist, and those that hang onto their investments during a downturn are likely to experience above-average returns over the medium to long term. Another reason to avoid withdrawals is for operating expenses, such as significant, discretionary expenditures that don’t produce assets that outperform inflation or expand over time. While occasionally is still OK, this shouldn’t be a regular activity.

Many investors sell equities funds simply because the returns are good and they are enticed to book profits. This is generally poor logic, in my opinion. Several equities and funds have created a lot of value during the past 20 years, increasing investors’ wealth by 10–20 times. If an investor had sold his investments after receiving a 2x return, he would have made huge profits but would have only kept 10–20% of the total value created.

Value creation would have been significantly reduced. Investors frequently react to recent news events in order to make money off of their assets. This is unproductive in a developing country like India. Covid-19 was a prime illustration. Similar to market crashes, the market’s recovery is frequently so abrupt that investors scarcely have a chance to participate in the market. Therefore, trying to time the market is pointless for long-term investors.

How should your financial goals be managed when redeeming mutual funds?

A source from MNS remarked “Let’s take a hypothetical example: You began setting aside a specific amount each month for 20 years for your children’s education. You’re getting close to tenure at this point, which means you might need money soon. It makes sense in such a situation to withdraw cash from equities funds and convert to safer investments, such a debt fund. Your money is safe to use for the intended purpose in this manner, and it also compounds—albeit more slowly.

“We think that asset allocation is the key to achieving a financial goal equity funds. A person cannot invest heavily in one asset class while ignoring the other. As a result, after deciding on a goal, funds should be invested in a variety of ways. This can change depending on the investor’s expectations and risk tolerance, he continued.

Redemption can occur for a variety of reasons. Investing more each month to reach the goal is the best approach to maintain the objective and keep progressing toward it. Anyone who begins a SIP or other sort of mutual fund investing does so with the salary they will have at the time in mind. In order to make up for withdrawals or to reach the goals sooner, it is advisable to gradually increase the monthly outlay.

“In the investment-making process, investors should have reasonable clarity on the financial goals that they intend to attain as well as the dates over which the goals are to be reached. From the initial top-up to successive redemptions, this is a continuous procedure. Throughout the investment process, investors’ approaches should be exceedingly systematic and disciplined. This would include choosing the appropriate combination of asset classes, funds, and risk awareness. They should consult a trustworthy financial advisor if necessary.

When to re-enter the equity market?

 “It is not timing but time in the market that helps you reach your goals. It is preferable to remain and reap the benefits of compounding. It is important to remember that Mr. Warren Buffet, one of the greatest investors of all time, acquired 99% of his money after turning 50. Such is the force of remaining. We support holding investments indefinitely until the investor experiences any of the aforementioned factors. You might investigate safer assets like fixed deposits and debt funds. Additionally, investors might convert to hybrid funds if they are uneasy about the volatility of the equity market.

The optimum time to enter the market is during a downturn or recession. One may now identify funds that prioritise value and fundamentals over just statistical upsides since recession fears have been looking for some time (more so worldwide than in India). Therefore, good equities with strong fundamentals and values can produce excellent returns over the medium to long term.

 SIPs are typically the most effective method of market investment for the salaried class. As a result, the impact of timing-based returns is significantly diminished, and averaging out market price contributes to the portfolio’s minimal average market returns.

“In my perspective, it is virtually impossible to timing the market,” stated Renaissance Investment Managers Director & Portfolio Manager Pawan Parakh. The fact that stock returns are nonlinear is more significant. There may be a few years with modest results and a particularly fruitful year. In light of this, investors should hold onto their equity positions and maintain a long-term perspective.

 Depending on the macro-environment, the portfolio’s allocation to equities can be raised or lowered; nevertheless, a complete departure is never advised. According to historical evidence, making investments in high-quality companies during difficult economic times has proven to be the greatest strategy over the medium to long term.

What additional investments might be considered after selling equity MF units?

“There is no hard and fast rule as such,  if your MF portfolio is large enough, alternative assets should be examined in order to prevent shocks or tanks in value. Other methods include investing in direct equities, REITs, directly purchasing a property, gold and commodities, buying into a small case type portfolio, etc. It is important to read about and comprehend these asset classes so that you can determine which ones are best for you in terms of diversification, money allocated to each asset, etc.

Before investing, it is essential to read and comprehend these assets to understand how the returns relate to different market dynamics, liquidity factors, etc.”

 Different asset classes have different return, risk, and liquidity considerations. This appropriate asset mix depends on a number of variables, including age profile, risk tolerance, and anticipated liquidity needs. As a result, the substitute for equity MF would vary depending on the circumstances. Wherever necessary, investors should look for reputable financial guidance.”

Bottom line

“To summarise and conclude, one should invest in MF for medium to short term, even if circumstances require them to exit early,” said MNS source. Once you are in a better position to invest, start investing again and create a strong portfolio. Start reading about and learning about various asset classes, and start making tiny investments in them. When your mutual fund portfolio is large enough, you should diversify it to make it more resilient to market shocks and to help you better understand different asset classes so you can determine which ones fit your investment and risk profile.