Investors are selling mutual fund investments for different reasons. For example, some mutual fund investors are leaving mutual funds because they have no faith in the industry – at least that is what their messages say. The lack of trust is due to many reasons. For example, various mishaps in the debt mutual fund space in the last two years – rating downgrades, defaults, MFs signing up agreements with defaulters, and lastly Franklin Templeton Mutual Fund shutting down six of its debt funds – greatly contributed to it.
Some investors are disheartened by the very low single-digit returns given by their equity mutual fund SIPs in the last one-. three- and five-year horizons. Also, these investors believe that the bleak economic scenario due to the pandemic is unlikely to improve anytime soon. This is the reason why many of them are selling their investments and booking whatever little profits they can to preserve their capital.
Many hybrid fund investors have also almost given up on hybrid schemes. They seem to have realised that they have not understood the risk-reward proposition earlier. According to several mutual fund advisors, many investors have been complaining that these hybrid schemes, especially aggressive hybrid schemes, are as risky as pure equity schemes, but they don’t provide adequate returns or downside protection.
The mis-selling of these schemes also contributed to the disenchantment with theses schemes. Most retired folks bought these funds for assured regular dividends. However, they became disillusioned after these schemes stopped declaring dividends in rough market conditions. According got Sebi rules, mutual funds can declare dividends only out of their realised profits.
However, some investors have kept faith in mutual funds, especially safer debt mutual funds. The trend of `flight to safety’ is visible in the July data which shows that investors have put money in short duration funds, ultra short duration funds, banking & PSU funds, and corporate bond funds. Some equity investors, fascinated by dramatic and quick recovery in the stock market after the declaration of pandemic worldwide, are still betting on equity funds.
Now, to the most important part of the story. What is your reason for selling your mutual funds? Are you hit by the economic disruptions caused by the pandemic? Are your facing threats on your career or salary fronts? Have you already been given a pink slip? If your response is yes to these questions, you have a reason to sell your investments. However, before that you must do a few things.
For example, you have to first check whether you have any liquid assets that may help you to pull through these difficult times. For example, do you have money in your bank? Can they see you through for the next six months or so? If so, you shouldn’t hurry to sell your investments. Even when you have nearly depleted your liquid funds, you should try to sell your short-term investments that are in debt mutual funds, before trying to sell your long-term equity mutual fund investment.
As for bleak economic prospects, you should remember that you would never be able to time you investment right. By the time there are firm cues on the economic revival, the market would have already gone up. That is the only reason why we keep investing through different phases in the market. If you invest only during the right market conditions, you would hardly make money.