You believe your SIP is a long-term investment, one that should not be prematurely ended. But it is not written in stone and you may have to be resilient in such cases. There must be a genuine reason for exiting your SIP, thus determining the right mutual fund exit strategy is essential. Additionally, bear in mind that there may be an exit load if you shut down your SIP before the agreed upon time frame. Let us consider some of the justifications for discontinuing your SIP.
1. Consistent underperformance is not a good sign
You began your equity SIP in pursuit of your long term objectives. It is important to bear in mind that SIPs on equities are a long-term investment and should not be judged based on the short-term situation. Although SIPs usually provide healthy, positive returns over 8-10 years, there is a way to spot any potential underperformance. Over the course of two years, assess quarterly 3-year rolling returns for this SIP compared to the benchmark and its peer group. A certain amount of fluctuation can be expected; however, if your SIP is regularly lagging behind both the index and its peer group, it may be time to explore other avenues.
2. Changes in interest rates or other macros
Shifts in certain macros usually indicate a shift in fund performance that could remain in place for an extended duration. For instance, when inflation remains high, equity funds may not be able to keep up. Similarly, investing via SIP into debt funds with longer maturities is not recommended when the interest rates are on the rise. Additionally, if you anticipate a decline in INR or a slump in GDP growth rate, you may consider ending your SIP due to such macroeconomic issues.
3. The goal to which your SIP was tagged is achieved
There’s nothing wrong with negative performance or negative macros. Maybe you started a SIP a few years ago to cover your home loan margin or maybe you started one ten years ago to cover your son’s college education. When a SIP is tagged to a particular goal milestone and the purpose of the SIP has been met, it is always best to terminate the SIP and use the funds for the purpose designated for. If you decide not to replenish the SIP, you can take an independent decision.
4. You are not on target to meet your goals
Again, your SIP does not match your ultimate goal. For example, your goal may still be a long way off, but your annual review shows you are falling short of it. Either the underperformance of the equity asset class or the underperformance of the SIP could account for this. Inflation or external factors might have increased the cost of your goals, so you should reconsider your SIP and take alternate measures.
5. Fund level changes are making you uncomfortable
This is quite a common problem. For example, the fund manager who was doing a wonderful job for the last ten years may have moved on. The AMC may also be sold to a new fund manager, whose strategies you may not be comfortable with. You may also terminate your SIP if you see that the fund has made some changes to its objectives or asset mix that may not be in line with your goals. These are again legitimate reasons to terminate your SIP.
6. The fund is all over the media for the wrong reasons
It is important to bear in mind that not all of what we see on the media or social media should be taken as gospel. We must be wary and take those reports with a pinch of salt. However, when we witness consistent information pointing to potential irregularities like SEBI investigations, punishment, customer displeasure, services related problems and circular trading allegations, it warrants concern. Of course, one-off media reports do happen but they should always be followed up judiciously. If you’re seeing overwhelmingly negative news regarding your fund cropping up on every outlet, it may be prudent to consider making an exit. Despite being baseless these reports could still potentially adversely affect your investments: why take a chance?
7. OK, it is just that it is rebalancing time
If the rebalancing process warrants it, you may decide to end your SIP. Suppose your equity funds have yielded a 30% annual return while you were aiming for 14%. This is a prime opportunity to shift some of the profits into a debt fund or liquid fund. Moreover, if certain goal-oriented milestones are drawing near, start terminating some of your equities SIPs and place them in debt funds or liquid funds in order to lessen risk prior to reaching those objectives. This action is simply rebalancing and an ideal reason for departing from SIPs.