Time your mutual fund profits using systematic plans: Here's how
Mutual funds are still recommended as means to grow investments for longer periods of time
Dubai: Mutual funds are still used widely as means to grow your investments for a longer period of time. This is why there isn’t a recommended time to book your profits, and if there is a right time to ‘book profits’ in mutual funds, it is advised to do so as and when you achieve your financial goals.
“Although it’s not wise to exit or liquidate your mutual funds too quickly as mutual funds are primarily structured as long-term investments, there may arise instances where you have no choice to do so, especially when you are in need of urgent money,” said Zubair Shakeel, a UAE-based investment advisor.
“Other circumstances when you may want to sell and maximize your profits includes a change in your investment goals, consistent underperformance of the mutual fund or the need to offset capital gains against capital losses. A way to do so is by using systematic investment, transfer, or withdrawal plans.”
SIPs entail designating a modest pre-determined amount of money for market investment at regular periods (often once a month). It is recommended as it allows you to participate in the market while better controlling risk.
Similarly, a Systematic Transfer Plan (STP) is a plan that allows investors to give consent to a mutual fund to periodically transfer a certain amount or switch (redeem) certain units from one scheme and invest in another scheme of the same mutual fund house.
Systematic Withdrawal Plan (SWP) is a service offered by mutual funds which provide investors with a specific amount of payout at a pre-determined time intervals, like monthly, quarterly, half-yearly or annually. The first two words are about investment, while the third is about withdrawal.
When do you make use of such systematic plans?
“SIP, STP, and SWP are systematic and strategic methods by which you can easily invest and withdraw from mutual funds and leaves you with much more perks,” said Mohammed Shaan, another UAE-based wealth advisor.
“As SIPs help you invest periodically or with discipline, mutual fund investors should make use of the SWPs when you are in dire need of funds, or STPs when faced with a risk that a volatile market will hurt your savings.
“Periodic transfers allow you to manage exposure through pre-defined instalments instead of concentrated transactions. This enables insulation against unexpected volatility events that disproportionately impact lump sum investments in a single stroke.”
Meanwhile, Shaan added that with SWPs, you get flexibility, as they are particularly beneficial for retirees and those pursuing financial independence. “SWPs allow regular withdrawals while enabling the remaining investment to grow, making them a strategic choice in today's financial landscape,” he added.
When do you exit or book profits with mutual funds?
You can easily bridge the gaps in income by using the above systematic plans to your financial advantage and understanding how they can help you reach your financial goals, you need to also check for the below circumstances when looking to book profits in mutual funds:
• Structured for long-term
As a type of investment, mutual funds are designed to be long-term investments. This type of fund is not intended as an investment you buy into and sell out of as the markets move up and down. Other types of funds -- such as exchange-traded funds, or ETFs -- are more suitable for in-and-out investing.
But as part of your overall portfolio strategy, you might experience times when it pays to sell some of a mutual fund investment that has increased significantly in value.
• Meeting investment goals
“If you’re investing for a particular goal - like retirement, your child’s higher education, purchasing a house, etc. - then the right time to redeem your mutual fund investments is when your investment reaches your target amount,” added Shakeel.
“Also, by staying invested in equity mutual funds for a long period of time to get the benefit of ‘Power of Compounding’, i.e. longer the duration more will be your returns. Unless you require money for your personal reasons financial planners often recommend that you don't abruptly sell and book profits.”
• When investment goals change
Shaan explained that another reason to sell a mutual fund and take the profits is that your investment goals have changed. For example, you have a stock fund that has performed well and now you want to draw an income from that money.
“One option would be to sell some or all of the stock fund and invest in a bond fund that pays monthly dividends. If you bought an aggressive growth fund when you were younger, you might sell that fund to go with a more conservative fund, such as a growth and income fund,” he added.
• When funds underperform
“Another reason to sell would be if the mutual fund is not performing for 2 to 3 years continuously,” added Shakeel.
“If you observe your mutual funds aren’t performing well compared to other mutual funds in same category or that category itself is not performing well compared to the market as a whole - it is then time to take back your money and put it in some other performing funds.”
Let’s say someone will say that over the last year, my fund has generated 25 per cent but five other funds have generated 30 per cent, so I will switch to those. This switching based on short-term past performance is counter-productive and does nothing to improve future returns. So coming back to the earlier point, only if a fund underperforms consistently for two or more years should you switch.
• Monitoring volatile markets
Also one frequent reminder for all mutual fund investors given by their advisors is to frequently monitor the market situation. If markets are much overvalued, then that is another reason it makes sense to move to cash or liquid funds.
Also another indicator to keep monitoring is inflation and how it affects your bond investments. Higher inflation may force the central bank to be cautious and extend the pause in interest rates, rather than easing rates to stimulate the economy. This will put a cap on further rally in bond prices.
Key takeaways
When it comes to mutual funds, systematic plans serve different purposes. SIPs are for achieving investment objectives, while SWPs provide regular cash flow. By integrating the two, you can enjoy the benefits of both: achieving investment objectives while receiving regular cash flows.
However, when you are looking to book profits from existing your mutual fund investments, here’s are the key reasons you should consider:
• Reaching the targeted investment returns
• Change in investment goals
• Performance has started deteriorating
• Fund manager changed
• Expenses increased suddenly
• Urgent need of funds
• Overvalued markets