Four factors to consider before stopping Mutual Fund SIP
Mutual Fund SIP (Systematic Investment Plan) is a long-term investment for your financial goals. SIP works on the concept of rupee cost averaging and the power of compounding. In Rupee Cost Averaging, we invest a fixed amount in equity funds through SIP. When the market price of the share is low, we bought more units. And when the market price is high we bought lesser units. In power of compounding, it works over a long period of time. We invest a principal amount in Mutual Fund SIP and earn returns. And the returns are also reinvested and you get more returns.
Factors of exiting your Mutual Fund SIP:
If the rupee cost averaging and the power of compounding is working perfectly then you continue your SIP for a long period of time. But there could be some factors to consider where you may require to exiting your Mutual Fund SIP.
1. Mutual Fund SIP consistently underperforming:
To begin with, an equity Mutual Fund is a long-term product. So you should not be in a hurry to terminate your SIP just because the fund has performed badly in 1 quarter. Give yourself a minimum of 2 years. Benchmark your SIP to the overall index as well as to SIPs in competing funds in the peer group. If you find your fund underperforming consistently, then it is time to move on. You can argue. that you are taking a long-term view on your SIP but you have already lost 2 years; which means you have lost 10% of your SIP tenure (assuming a 20-year goal). If you look at it that way; it does look substantial. Secondly, a fund that has underperformed in past continuously has a very low probability of bouncing back. Most likely it will remain a laggard in the peer group. If underperformance is consistent, shift to a fund that has the potential to outperform.
2. Fund objective is not in sync with your objective:
This happens quite often. For example, you invest in a diversified equity fund to manage your concentration risk. But the fund may decide to merge the fund with its banking fund to gain economies of scale. The problem for you is that it becomes a fund predominantly invested in banking. That is not the risk you are willing to take because that was not your objective in the first place. In this case, you should just shift your SIP to another fund. Quite often, funds tend to change the core objective of the fund in order to improve performance. Again, you need to evaluate if this shift is in sync with your objective.
3. Not comfortable with structural changes:
The mutual fund business is a business of size, and therefore it is constantly going through a phase of consolidation. We have seen many large fund houses like Morgan Stanley, Deutsche, JP Morgan, Fidelity, Alliance etc merge out with larger domestic names. It is possible that you may not be comfortable with the new management that has taken over the funds you own. Under SEBI guidelines you are supposed to be given an exit without any obligations and you can avail of that. It may not be about performance but more about your comfort with the new group. Also, there could be changes in the fund managers, CIOs, and CEOs which might reduce your comfort level with the fund house. In this case, again you have a reason to shift your SIP to another fund house where you are more comfortable.
4. Financial goal linked to the SIP has been achieved:
Quite often you tag your SIP to a specific financial goal or a milestone. For example, SIP X may be for your home loan margin, SIP Y may be for your daughter's junior college and SIP Z may be for her post-graduation. What should you do in such circumstances? The basic rule is that if you have tagged a particular SIP to a goal then at the event of reaching the milestone, just discontinue the SIP. That brings continuity and predictability to your financial plan. Once your milestone and your SIP are canceled off against each other, you can take a fresh view on what do with the money saved and then build that into your financial plan.
