Generally, advisors advise their customers to remain invested regardless of market volatility. However, there are situations when exiting a fund is the best counsel you can give. A financial advisor may request that a customer withdraws from a fund for a variety of reasons.
“Even when you have achieved your financial goal, there are certain events that must be viewed as a red flag. These events warrant a review of the fund in light of this new information. While consistent poor performance for over a year could also be because of a transitionary rough patch, it is best to investigate and seek qualified advice on the same,” said Anand Dalmia, Co-founder, Fisdom.
So, when to know it is time to exit your scheme?
A frequent change in the top management team or fund managers is another red flag that there is something wrong with the fund. As an investor, you should avoid funds with a high rate of senior management resignations because this indicates that the fund’s administration is ineffective.
Standard deviation measures the level of volatility of a mutual fund. It also indicates how much your fund’s return can deviate from the historical mean return of your scheme. A higher standard deviation infers greater volatility, whereas a lower standard deviation bodes well for investors with a low-risk appetite and less volatility. A growing standard deviation typically indicates that a fund’s performance is uneven. It is preferable to exit the fund in such instances.
A regular deterioration in performance is one of the primary warning signs that investors should be wary about a fund. If a fund underperforms its peers, this is one of the primary indicators that they should exit the fund. That is why it is critical to compare the fund’s performance to its peers rather than to the market. Further, it is a wise decision to withdraw from poor-performing mutual funds especially you have already achieved your financial goals.
In the end, it is always better to exit a few funds while rebalancing their portfolios if they no longer serve their objectives either with the help of a financial planner or an adviser.
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