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My goal is 3Y away should I exit my equity mutual funds?


A reader writes, ” I am in a dilemma and need your advice. I am 3 years away from one of my financial goals. On analyzing my MF portfolio the peak value was in October 2021 and the markets have corrected since February 2022. If I systematically transfer the money now from the equity fund and park it in a debt fund, the value is lower than what I could have got in October 2021. If I keep investing in equity funds as it is, the value could go either way due to uncertainty and sentiment prevailing in the market. What should I do?

The only goal of investing is to ensure you have enough money for financial goals. Whether your investments are underwater (that is, their current value is lower than their all-time high) or not is irrelevant!

Regardless of how much it hurts emotionally to exit your mutual funds, it is time to do so. Your situation is a real-life example of two recommendations we often provide: (1) Do not go overboard on equity for goals less than 10 years away.

(2) Do not stay invested in equity until the last minute and never take this suggestion from other “advisors”  seriously: You can stay invested in equity mutual funds up to three years before a goal deadline and then start tapering. 

This is plain wrong because of the sequences of return risk which you are currently experiencing. You can see a lot of rosy pictures of how equity investing is beneficial for you, but if you catch a bad sequence of returns then your experience would be nothing like what is advertised.

This is why we keep talking about goal-based risk management. Regardless of the return you make on your investments, the only thing that matters is, “do we have enough money for our goals?”.

So do not systematically transfer from equity to debt when there are only three years to your goal. Exit in one shot from equity funds to safe fixed income. Ideally, you should have started reducing equity allocation much, much earlier (whether you made some return or not!). Since that opportunity has gone, please exit in one shot.

It is natural to ask, can I wait a bit long for the markets to recover? If you need say, Rs. 25 lakhs after three years and you have already accumulated about Rs. 40 lakhs in your equity funds then you can shift Rs. 25 lakhs to safe fixed income (a liquid fund or a money market fund or an arbitrage fund or a simple bank FD if that is what you are most comfortable with) and then leave the rest in equity funds and take a chance.

If your portfolio value is below the goal target or not too much above it, then it would be to exit from all your equity funds or at least shift most of your money out to fixed income.

You may have heard the generic advice, “Do not use equity mutual funds for goals less than 5 years away”. This is reasonable, sane advice because there is no time to recover if there is a poor string of returns at any point in the investment journey.

What we often fail to recognise is that every long term goal will become “less than 5 years away” at some point. For example, you start investing today for a goal 25 years away. After 20 years, that goal will become a 5-year goal. So it cannot continue to have the same asset allocation and risk profile when you started out.

The right asset allocation (equity: fixed income ratio) and the right equity weight-reduction plan are crucial for peaceful goal-based investing. If you a new investor, you can get started by watching this seminar: Basics of portfolio construction: A guide for beginners.

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.


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