A Metric Driven Approach to Selling Mutual Fund Units

Photo by micheile henderson on Unsplash

Before I overwhelm you, assuming you read beyond this paragraph, I wanted to let you know that there is a particular framework within which selling mutual fund units in a methodical way is relevant. That framework is goal-driven investing, & if that’s not of interest to you, well, I can also talk about playing squash.

Goal-driven investing

All my investments are driven by goals. A goal is simply three things put together:

1. A purpose, such as paying tuition fees for your child, say for class 5.
2. A maturity amount, such as a sum of 150 thousand INR, or 1.5 lakhs.
3. A maturity date, such 1st June, 2025.

The second tenet that I follow is that a goal, any goal, should be invested in via a mix of instruments, with the mix changing over time as maturity nears. The underlying philosophy here is to increase the likelihood of hitting the goal, not maximising the money you can make.

Goal!

This is what a goal may look like:

Exhibit 1: Expense planning for servicing my car annually

As you can see, with the exception of the October 2025 expense, the other two are distributed across more than one instrument. I, apparently, don’t practice what I preach very consistently.

The October 2024 line item has only <15% of target amount allocated to an equity fund at this point, the equity allocation is much higher for years 2025 & 2026.

So, here’s what this article will seek to address:

When should I reduce exposure to equity as my goal approaches?

The first thing you can do is calculate the round-trip duration for the equity fund you’re invested in for the given goal. A round-trip, historically, is the duration beyond which the NAV has always increased.

If your duration to maturity is greater than this round-trip period, statistically, there’s no need to sell out of the equity fund quite yet.

Many, if not most, equity funds will have the average round-trip duration in days, sometimes in weeks.

However, we’re not worried about protecting against the average. If you can protect against the worst, you’ll obviously protect against the average. But if you always protect against the worst, you’ll generally sell sooner than you need to leaving some capital appreciation on the table.

In any case, the round-trip duration can help guide you on when to sell, whether you consider the average or the worst case, depending on your risk appetite.

The second thing to guide your decision is the required rate of growth of your investment in the time remaining to maturity. Let me explain with an example. Here’s a different goal with this additional metric:

Exhibit 2: Required rate of growth

We can infer from the table that the current value of 144K INR needs to grow by 3.21% between now & March, 2025 to equal 150K INR, our target maturity value.

We note that:

The historical return of the safe fund “B&P” is substantially higher than 3.21%, so I can easily switch my investments from ES to B&P & rest assured that I’ll still make my target.

Further, the round-trip duration, even the worst-case one, ceases to be a consideration for the B&P fund, basis historical data.

So, switching my investments into B&P from ES will hit my target with negligible risk.

In summary

In summary, or otherwise, I don’t quite know you, particularly your risk-appetite. So, I can’t say what you should do. With that caveat, I recommend that you:

1. Do not sell out of equity before the time to maturity for your goal is less than the worst round-trip duration of the equity fund under consideration.

2. Know the required rate to maturity & switch from equity when such a rate is less than the general growth prospects of the safe fund.

Happy investing!

If you'd like me to work with you on investing for your goals, 
drop me a note at souvik.mitra@gmail.com, or comment on this post.