Factors To Consider Before Investing In Or Exiting Mutual Funds

Investors often look at various details related to their mutual funds and then make a quick decision about investing or exiting from a particular fund.

It is vital to consider the factors that are taken into account for these kind of decision as their impact can be long lasting. If this is based on a single factor then it might not be the best way to proceed with the entire process and it is always better to consider multiple factors before arriving at a final decision.

There are many reasons why this would be an appropriate way to proceed.

Specific developments on the regulatory or the disclosure front can trigger a lot of excitement and buzz around some data related to mutual funds. This can lead to a single factor dominating and capturing the attention.

One such example if the recent stress test that were conducted by mutual funds for their mid-cap and small-cap funds. The entire attention was focused on the number of days it would take for the fund to liquidate 25 % and 50% of the portfolio. At that particular moment when details of this are being discussed and experts are giving their views on it the natural reaction of a lot of investors is to look at their funds and then determine how they stand on this particular parameter.

At such points of time it is important for the investor to take a slight step back and pause and think about the implications of any move that they make.

Looking at a single factor should not be the basis for taking an investment decision unless this is so significant that the entire investment is at risk. This is to ensure that the investor does not get carried away by a single factor and consider that everything or nothing is fine because this is just a single dimension to the whole investment process.

The main thing for the investor to do is to pause before taking any step and consider several other parameters too. For example a fund might have a slightly higher number of days to liquidate 50% of their portfolio but this has to be considered along with the size of the portfolio too and the fund management strategy to determine the position that the fund is in.

Investors should always look at several factors while they are making an investment or an exit decision. This includes the track record of the fund manager plus also the size of the fund and the strategy that it follows. The performance of the fund through good times as well as bad will give an indication to the investor about the ability of the fund to navigate different situations. Only when all of these are weighed together can a proper decision be made by the investor about the suitability of a fund for their portfolio and their needs.

The best way to avoid running into trouble is by ensuring that the investor is able to stick to a particular plan and not change it with every passing development.

There will always be a lot of noise and excitement in what is happening all around and this gets amplified but this should not become the basis for the investor to throw their planning out of the window. There is a certain reason why the investor should have chosen the funds in their portfolio and as long as their needs require this they should stick to it.

Feeling left out or suddenly panicking about risks is something that needs to be avoided because this can be the basis for ensuring that their long term goals are achieved.

Arnav Pandya is founder of Moneyeduschool