Should You Sell Your Mutual Funds, due to the War Between Russia and Ukraine?

With the news of an invasion by Russia of Ukraine, geopolitical tensions have clearly escalated.

In view of the escalating tensions, have enforced sanctions against Russia. India has taken a neutral stance asking for issues to be resolved with "quiet and constructive" diplomacy.

But it appears that geopolitical tensions will be escalating, and the sanctions may be less effective in stopping Russia. Russia seems resolute in its approach.

The global equity markets have been reacting to tensions between Russia and Ukraine with some jaw-dropping dips of late.

Volatility has intensified worldwide. Investors are panicking and taking money off the table before tensions escalate further and result in a war.

Against this backdrop, many investors are asking the question - Should I redeem/sell my mutual fund investments now?

It is natural to ask this question., Given the stupendous gains made in the last couple of years anyone would like to protect the gains by booking profits.

Besides, it is not just tensions between Ukraine and Russia worrying the market. Still, other factors such as skyrocketing inflation (especially in the U.S), overheating of crude oil prices, supply-chain disruptions, the possibility of interest rate hikes, liquidity squeezing, and their serious ramifications on the economy, are all making the markets jittery.

Having said that, should you sell your mutual fund investments in panic?

Well, hitting the panic button and redeeming mutual fund schemes may not be in the best interest of your financial wellbeing.

You cannot simply decide by looking at the intense volatility or market direction. Following a prudent approach is necessary.

Here's when you should consider selling/redeeming your mutual fund investments:

1. When you are not holding some of the best mutual fund schemes resulting in underperformance of the portfolio

   We all make mistakes. It is possible that you bought certain schemes based on the unsolicited advice of your friend/relative/neighbour/colleague. You may be holding schemes that are faltering on returns and/or exposing you to undue risks.

   At times, even carefully selected mutual fund schemes do underperform. Also, the fund manager's investment bets may not have yielded the best returns.

   In such cases, you need to scientifically review the mutual fund portfolio to weed out the duds. This may help you get the portfolio back on track and make it robust by replacing certain schemes that have been non-performers.

   This mutual fund portfolio review exercise needs to be done scientifically and not arbitrarily. Ideally, make it a point to carry out a comprehensive portfolio review once in six months or when your financial circumstances have changed.

   Don't be under the impression that the best mutual fund scheme of one time will be the best even today.

   Take the case of HDFC Top 100 Fund. A few years ago, this large-cap fund was one of the top performers and a favourite among investors. But today, it is nowhere in the list of top-performing large-cap funds. It failed to maintain consistency and has trailed many of its peers when compared on all parameters.

2. Fundamental attributes of the mutual fund scheme have changed

   The mutual fund industry is under constant change. If you have been holding mutual fund schemes before the mutual fund categorisation and rationalisation norms came into effect, maybe you need to revisit your portfolio.

   This is because the fundamental attributes of several schemes have changed. A lot of schemes have merged, their investment mandates altered.

   Mutual fund schemes in your portfolio may not be following the same investment strategy when you initially opted to invest. The schemes may be incongruent with your risk profile, investment objective, your financial goals, and investment horizon.

   Also, if the star fund manager has quit, that should not be the reason for you to exit the scheme as long as robust investment processes and systems are followed at the mutual fund house.

   The exit of a star fund manager is not a change in the fundamental attribute. Likewise, a change in expense ratio and exit load cannot be considered as a change in fundamental attributes. These should not be the reasons for you to sell/redeem mutual funds.

3. There are other alternatives available

   You would agree that the entire investment landscape is dynamic, ever-changing. In the last few years, owing to low-interest rates, many investors tried their hands at equities - through stocks and mutual funds - and made good returns.

   But going forward, if interest rates rise or the spotlight turns to gold owing to escalating geopolitical tensions, do consider the other available alternatives from a diversification standpoint for optimal risk-adjusted returns.

   "It is the part of a wise man to keep himself today for tomorrow and not venture all his eggs in one basket," said the Spanish author Miguel de Cervantes in his book Don Quixote.

   Year-on-year performance of equity, debt, and gold

   
   

   The graph above is a testimony of the fact that not all asset classes move in the same direction at the same time.

   In certain years, gold and debt have clocked better returns than equity. Therefore, it is a sensible idea to distribute your investible surplus across all asset classes recognising the asset allocation best suited for you.

4. The portfolio appears skewed and needs rebalancing

   Over the last two years, the equity portion of your investment portfolio may have considerably moved up due to a strong rally.

   If your allocation is overly skewed to equities greater than 70% that you wish to maintain, you need to rebalance the portfolio. In such a case, you may redeem from equity mutual fund schemes and reinvest in debt mutual funds and/or fixed-income securities.

   Also, over time if your ability to take risks has changed, your outlook towards money is different, investment objectives are dissimilar, risk-return expectations have changed, you wish to adopt a change in investment style, and your time horizon has altered; you need to rebalance the portfolio to best suit your needs.

   Note that growing older diminishes your risk tolerance; hence, you may consider shifting from high-risk to low-risk assets if that is the case.

   In the same way, if you are just 2-3 years away from your financial goals, it is better to deploy money in a low-risk asset class. This way your capital is possibly protected and you are not subject to rampant volatility of the equity market.

5. You have attained your financial goal

   If your equity funds delivered better than expected returns, you might have ended up building the corpus for your envisioned goal before the target date.

   If that is the case, it is a good reason to sell/redeem your mutual fund schemes, particularly the equity-oriented ones. If you do not need it immediately for the financial goal, this money could be parked in pure Liquid Fund/s or a bank Fixed Deposit/s.

   Doing so will preserve the value of the wealth created until the time you need to withdraw it to fund the goal.

Never commit the mistake of redeeming or disinvesting your mutual fund schemes to address contingency needs. This is particularly true when you own some of the best schemes in the portfolio.

This would apply brakes to the process of compounding. Then fulfilling the envisioned goals shall remain a distant dream. To avoid that, make sure you are holding an adequate emergency fund (12 to 18 months of regular monthly expenses, including the EMIs) so that you can handle any unpleasant surprise that comes your way.

Make sure you are selling/redeeming your mutual fund units only if your reasons include the five highlighted above.

Finally, please remember that going forward, if market volatility intensifies, do not discontinue your SIP Systematic Investment Plans (SIPs), in worthy mutual schemes, particularly when addressing certain financial goals.

You might miss a chance of accumulating more units if you discontinue or stop (SIPs) when markets are in a downtrend. This will end up applying brakes to the process of compounding, considered to be the eighth wonder of the world.

Keep in mind that mutual funds are a potent avenue for wealth creation.

Happy Investing!

Disclaimer: This article has been authored by PersonalFN exclusively for Equitymaster.com. PersonalFN is a Mumbai-based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinions on investing.