Invested in the wrong mutual funds? How to fix this with minimal loss!

“I chose a couple of mutual funds based on the information I received from my friends – they told me that they had been investing through the SIP route in the said funds and the returns had been pretty great. This happened a few years ago and the pitfalls of that episode taught me that cookie-cutter investment strategies can be recipes for disaster. Since then I have never fallen into the trap of investing in mutual funds simply because they seem to have arrested the attention of a coterie of retail investors,” narrates Swati Anand (name changed), a software engineer based out of Mumbai.While there has been an encouraging trend in the investment landscape with more and more amateur retail investors acknowledging the importance of investing beyond the comfort zone of fixed income investments and venturing into mutual funds, stories of financial debacles due to poor choice of mutual funds are not unheard of. Add the all-pervasive social media clamour to the mix and navigating through the maze of numerous mutual fund offerings can be a real challenge to many investors.Often wrong mutual fund choices are driven by regret over missed opportunities and fear of losing out on perceived opportunities in the investment scenario. In such situations a realistic estimation of one’s risk profile takes a backseat and the eagerness to reap higher returns in a short span of time assumes center stage. This is especially true in the case of equity mutual funds, where returns are higher and it is easy to buy the narrative that it can be a great way to become rich quickly.“When I had slipped into that zone where I randomly invested in mutual funds because someone told me that a certain fund will generate great returns, this is exactly what had made me become convinced about the idea. I completely ignored the fact that equity is best suited for the long term and continued to harbour the misconception that the equity magic would work in a short span. In the process, I incurred heavy losses,” says Anand.After the realization that your portfolio may have mutual funds that serve you no purpose and can even cause you financial distress, pulling out those investments can seem another challenge. It is common to get caught up in the dilemma as to whether you should stay invested for the duration of the investment or you should pull out all at once. The latter may be a bigger challenge in the case of equity mutual funds because if the markets are wallowing in the red zone at that point of time, exiting may increase the risk of losses.Anand reminisces about having to seek help from a financial advisor to figure out the best possible ways to exit her investments with minimal losses. “I had already made major blunders by investing in mutual funds without any consideration for my risk profile and goals. I didn’t want to aggravate things while pulling out from those funds and thus sought professional help to exit those investments in the least harmful ways in an optimum timespan,” she says.Systematic withdrawal plans (STPs) in the case of some funds and withdrawing investments while monitoring market conditions closely were some of the strategies that helped Anand. “Keeping an eye on market movements may be tedious especially if you are unfamiliar with the investment game but this is where professional help filled the gap. My advisor also channelized the money drawn from the equity funds short-term liquid funds that suited my risk profile and goals. I also kept some of the withdrawn money in short-term fixed deposits to ensure I did not end up spending it unnecessarily until I had a clear idea of what my portfolio should look like,” she says.Deepak Chhabria, CEO of Axiom Financial Services opines, “Investing is not as straightforward and simple as it appears. Investors are often impetuous with investment decisions. Often investing is unplanned and ad hoc, which often leads to wrong product selection and thus poor outcomes. This may entail course correction, and sometimes may require taking a hit on the invested amount. In principle, the mistake can be because of an outright wrong product, mismatch in investment horizon required by the product and that available with the client, fund commitment towards the product, and most importantly underestimation of the risk involved. Each will require the investor to deal with it in a different manner.”Explaining further as to how investors can rectify those mistakes and move towards a worthwhile investment path, Chhabria says, “In case of wrong product selection, the earlier you exit, the better it is for the investor. It’s easier to accept small profit or loss and move into a more suitable and better product, here one must also factor in opportunity costs due delay in decision making. Waiting for expiry of exit load period or kicking in of long term year holding period may turn out to be counterproductive. The serious mistake is one where investors underestimate risk associated with the investment vis-à-vis their risk appetite, implication can be severe and may ultimately lead to losses, considering investment horizon and fund requirement. If the suitable product should have been a debt fund and greed has led to investing in equity, waiting for the market to revive to recoup the loss can be painful. In some cases it may be better to take a small loss and make amends.”Key takeaways-In the period between exiting the wrong investments and finding the appropriate products for investments, make sure to re-evaluate your goals thoroughly.- If you have incurred heavy losses due to investments in wrong mutual funds, do not hesitate to seek help from a financial advisor to avoid any further mistakes due to the stress of already having lost money.- It is common to get caught up in the dilemma as to whether you should stay invested for the duration of the investment or you should pull out all at once.- In case of wrong product selection, the earlier you exit, the better it is for the investor. It’s easier to accept small profit or loss and move into a more suitable and better product, here one must also factor in opportunity costs due delay in decision making.- Waiting for expiry of exit load period or kicking in of long term year holding period may turn out to be counterproductive.This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.