Knowing when to switch is as important as when to start

By Abhijeet Dey


The best thing that you can do for your financial goals is to start your investment journey. Creating a robust financial plan and then making an investment decision on the basis of the said plan will put you on the right track to achieving your financial goals.  It is widely accepted that the best time to start your investment journey is “now”.

However, there may be times when an investor could consider switching his/her investments from the current investment fund to another fund. Some of these are discussed below:

When to Switch?

On achieving financial goals – the very purpose of earning, saving and investing is to ensure that you and your family are able to lead a comfortable life and fulfil your financial goals. Thus, it is very important that when you start your investment journey, you also chalk out an exit strategy. Generally, for long-term goals, many individuals choose to invest in equity instruments.

In this case, investors could consider switching from their equity investments to other options like money market mutual funds as they approach their financial goals.

This could help ensure that as you reach closer to your goal and the need for the funds arises, the returns that are generated are maintained. 

On prolonged underperformance

Investments are made to generate returns. These returns, in turn, ensure that we have enough funds to meet our financial goals.  It can happen that a fund that we are invested in is unable to generate the targeted returns which could help them meet their goals.  

In such a case, an investor can choose to switch his investment from such a fund to an alternate fund after evaluating the available investment options.  However, it is important to understand that funds can sometimes underperform for short periods of time due to market volatility, changing investor sentiment and news flows.

One should try and evaluate the reasons for underperformance and determine whether the reasons are temporary in nature or are likely to have a long-term impact on the performance of the fund. In case, they are temporary, say, due to market movements then one can choose to wait for a couple of quarters before making the decision to switch.

However, if this seems to be more long-term in nature then one should immediately consider switching to a different fund. 

Change in risk profile

Every investment instrument has a certain degree of risk associated with it. This risk usually pertains to the uncertainty of outcome and in some cases loss/default. Just like an investment has a certain risk profile, even individuals have a risk profile that reflects their ability and willingness to take a risk.

A person who has a high-risk tolerance would usually prefer to allocate a larger proportion of his investments to equity. However, during the course of life, an individual’s circumstances can change which can have an impact on their risk tolerance.

In such an instance, one can consider switching their investments to a fund that is better aligned with their new risk tolerance levels. For example, an individual with a high-risk tolerance and commensurate allocation to equities could face a downfall in his salary income in a global downturn. As a result, his ability to tolerate risk could definitely fall. This individual should consider switching some of his high-risk investments to low-risk products.

On change in investment objective

Any investment decision should be taken after an in-depth analysis and in adherence to the investment plan. Most investment decisions are tethered to an individual’s return requirements, risk profile and investment time horizon. An alignment between an individual’s investment objective and the fund’s investment objective is integral to achieving financial goals. A change in the investment objective of a fund could trigger the need to switch your mutual fund. 

Portfolio rebalancing

In order to create an optimal portfolio that is capable of meeting your financial goals it is important to adopt an asset allocation strategy that dictates the proportion of funds invested in different assets. In certain market scenarios, the value and consequently the proportion, of a particular asset can increase relative to the other assets.

This scenario would require an individual to rebalance his/her portfolio and switch schemes to bring back the portfolio to its original allocation.

Investing for the long-term has myriad benefits which can include compounding and smoothening volatility.

However, due to changing investment environments and circumstances investors sometimes need to switch their investments from one mutual fund scheme to another.

In any event, investors should ensure that all investment decisions are made in adherence to their financial plan.

(The writer is Senior Fund Manager - Equities, BNP Paribas Mutual Fund)

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