Equity mutual fund investors often attempt to time the market. This strategy involves waiting for market declines to purchase shares at lower prices, with the intention of maximizing profits by selling at higher prices. While the principle of buying low and selling high is widely regarded as the optimal investment strategy, its execution is considerably challenging.
The stock market is inherently volatile, making it difficult to accurately identify the lowest and highest points. Occasionally, as the market reaches new peaks and stock valuations rise, some investors may feel compelled to realize their profits. While this approach is not inherently flawed, adhering to fundamental investment principles can be beneficial. It is essential to adopt a prudent strategy regarding the sale of mutual fund units or the decision to exit investments.
For mutual fund investors, there is no definitive moment deemed ideal for exiting. The notion that one can time the market implies the ability to predict optimal exit points, which is generally discouraged. It is advisable to adhere to the well-known principle of remaining invested in the market over time. Nonetheless, there may be legitimate circumstances that necessitate accessing funds from the market. Let us examine some of these situations.
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Are your goals approaching?
If your financial goals are approaching, it is prudent to transition from equity funds to less-volatile liquid funds through a process known as de-risking. For long-term objectives, such as funding education or retirement, it is advisable to divest from equity funds well ahead of the investment horizon, ideally two to three years in advance. Even if there is a slight shortfall in returns of approximately 6-7%, liquid funds can effectively bridge the gap for the remaining duration of your investment timeline for these goals. Short-term objectives or those that are imminent should be directly addressed with liquid mutual fund investments, rather than being left vulnerable to the fluctuations of equity markets.
Fund Performance
It is essential to conduct regular evaluations of your mutual fund scheme’s performance. While certain funds may consistently exceed expectations, many actively-managed funds may underperform relative to the market or their benchmarks. If, during your review, you identify underperforming funds within your portfolio, it may be prudent to consider divesting from them.
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