Factors that should prompt you to stop an SIP and exit a mutual fund

If you have been paying those SIP installments over a period of time, chances are that at some point, you would have asked yourself whether you should discontinue the payments.

The desire to pull out may be because the market has been on a downward trajectory and your investments have been losing value, or that the fund manager is not able to match the kind of returns that peer funds are giving.

Well, these may not always be good enough reasons to stop your SIP.

So what are the triggers that should prompt you to take the call and stop your SIP? Generally, financial advisors recommend that an investor should sell their holdings and stop their SIP if the fund in question discontinues working to achieve your investment goals.

Kunal Bajaj, CEO and Founder of Clearfunds.com says: "Each scheme has a particular place in the investor’s entire portfolio. So, they need to be evaluated time-to-time for you to take an action of stopping SIP, exit from the fund and switch to new scheme by continuing SIP."

Let us now look at the factors that determine when to stop an SIP and exit the fund.

"When there is a change in the investment objective of the fund, the investor must revaluate her existing investments as well as SIPs. After all, the reason for owning the fund will change with schemes objective," Bajaj explains.

Basically, an investor needs to reconfirm if the new objective of the fund matches his or her own objectives.

Sanjeev Govila, CEO of financial advisory firm, Hum Fauji Initiatives is of the view: "If the new objective of the fund does not fit into the overall asset allocation, the investor should not only stop the SIP but even the entire accumulation in that fund warrants a change."

Currently, with re-categorisation of mutual fund schemes, AMCs are announcing mergers of various schemes, forcing all funds to be "true-to-label."

"As a result, in the next few weeks, almost all investors will need to evaluate whether their existing investments and future SIPs will continue to help them achieve their investment goals," says Bajaj.

Vidya Bala, Head of MF Research at Fundsindia.com, says, "Post scheme re-categorisation when a fund changes colour in its strategy then stop SIPs and start in the originally planned category. For example, if a large-cap fund becomes a multi-cap fund, then make sure you have a large-cap allocation to substitute this fund."

Change in fund manager of a particular fund and his or her investment style plays an important role.

Chirjiv Singh, Senior Consultant with TASS Advisors, says, “Performance of a fund manager is being judged by the ‘alpha’ ratio which is a major criteria while advising a mutual fund to an investor. His way of asset allocation is the most important factor on which mutual fund achieve its returns.”

So both the fund manager’s experience and his or her investment methodology do matter when it comes to driving a mutual fund's returns.

“In case the fund manager is not known to be strong in the kind of strategy that the fund employs then the fund performance should be carefully scrutinised and then the decision be taken of stopping an SIP and exiting from that scheme,” says Govila.

It is also recommended that you start a new SIP altogether in same scheme category, and transfer one's funds to new one.

Some experts believe that investors shouldn’t read much into the change of a fund manager. They just need to keep an eye on such funds while reviewing major changes in the portfolio and comparing the fund's performance to its peers in order to benchmark.

Shalini Sekhri, Chief Business Officer, Indiabulls Asset Management Company, says: “Appointing a new fund manager is a material change, however most professional AMCs follow an institutional approach to the investment process and are rarely reliant on one individual for taking investment decisions. There is typically a fund manager supported by research analysts and also checks and balances are built in through CIO review and investment committees.”

Govila says, “Poor performance of a scheme compare to its peers and benchmark for last 6-8 quarters is a fairly long time to decide to stop SIP and switch to new scheme in same category. However, there is a probability the fund has a specific strategy which is not performing in a particular kind of market.”

So before stopping one's SIP, one must identify what’s going wrong with the scheme by talking to fund managers and mutual fund experts.

“There have been several instances in the past where a fund did not work well for several years from the date of inception but overall from the long-term perspective, the returns have been remarkable. For instance, Reliance Growth Fund - Growth Plan and Franklin India Prima Fund are two such examples,” says Chirjiv Singh.

Stopping one's SIP when the market falls due to fear of losses is not the best thing to do. Bala points out that anyone doing this loses an opportunity to average their investments and bring overall costs down.

Take the period between January 2010 and March 2018, and a monthly SIP of Rs 1,000.

If one had stopped his/her SIP in the downturn of 2011, assuming one waited until the correction really got underway, and waited for the uptick till mid-2012, he/she would not have made any gains or losses for 15 of the nearly 100 months.

Detailed below is the opportunity cost for an investor if he/she sat out those 15 months:

Ideally, SIPs should be investments in perpetuity. However, like all investments, one must review, re-balance and reset portfolios in line with current requirements and their risk appetite.