When should you consider exiting a fund

The common investment philosophy that many investment gurus preach is that investment in mutual funds are for long-term and you need to give your investments few years to grow. The only problem with this philosophy is that what is long term and what if it does not grow even after few quarters or years. In addition to this, there may be cases where it was performing when you bought and for some reasons because of change in Fund Manager, the churning of the portfolio it started lagging against its peers.  

Therefore, exit strategy becomes equally important. The easy answer to your exit strategy is that you should exit a fund when it stopped performing. The harder question to answer is to find how often should we monitor a fund and what is the duration we should wait for before deciding it has stopped performing.

  
Hence, monitoring performance of the fund becomes an integral part of your investing. There is no thumb rule as to how and when an investor should review his mutual fund holdings, as every investor invests with a goal and return expectation in mind. Nevertheless, there are some common ways in which funds are reviewed and monitored. Only after such revision, you should consider exiting your investment. 

First the performance of fund should be compared to similar type of funds. Therefore, a large-cap oriented fund should be compared with large-cap funds. Similarly, a sectorial fund should be compared with same sector fund of any other fund houses.  

You should also consider monitoring and reviewing the fund's performance based on your investment horizon, goal and return expectation. All the above variables keep on changing with time and hence you should be on top of your goal and return expectation to exit a fund. For example, with age and change in mutual fund’s portfolio both the goal and return expectation changes. 

 
Coming to calculation part of your investment returns, you should use xirr, which considers your cash inflows, outflows and the time they accrue. This is a more powerful tool to analyse your returns rather than its cousin IRR (internal rate of return).  

Therefore, you should keep on monitoring your fund performance atleast every quarter as this will give you a sense of how the fund has been doing of late and it’s better to take corrective action sooner than later. With advancement in technology now buying and selling of funds has become easy and you may not wait for long to take appropriate decision.