Why does exit timing matter for mutual fund (MF) investors? The 5 key factors you must know

The simple truth is that although entering may start the race, your exit plan frequently determines whether you actually win, as noted by financial experts such as Pankaj Mathpal and Ronak Morjaria.

Here are 5 things financial experts emphasise about the importance of exit timing:

1)Avoid exiting too early

When markets rise, mutual funds typically deliver strong returns, but during downturns, they may experience short-term losses. In a falling market, mutual fund investments can temporarily decline in value before recovering with market conditions.

"Exiting too early out of fear (like in market corrections) can lead to lower returns than what the fund is capable of delivering," said Pankaj Mathpal, MD & CEO at Optima Money Managers.

2) Avoid exiting too late

Staying invested after reaching your goal can expose you to unwanted market ups and downs. "Exiting too late without a goal-based strategy may expose you to unnecessary risk just when you need liquidity," said Mathpal.

3) Exit near your goal

A planned exit, say, shifting equity gains into debt as you approach your goal, helps preserve returns and reduces volatility risk, said Mathpal.

4) Timing matters for sector or thematic funds

Sector and thematic funds move in cycles. These funds rise and fall with the sector so timing your exit is important to avoid losses.

5) Use a systematic exit strategy

Start taking out your money or selling in parts about six months before you need it. This helps protect you if the market falls.

"It is always advisable to start exiting your MFs systematically via SWP or sell in tranches at least 6 months in advance before you need the funds. So that you can even exit at a different price. You don't run the risk of market crashes like Covid or like those witnessed during the tariff war, and thus not see your portfolio value dropping sharply in a short period of time," said  Ronak Morjaria.

Exit loads and income tax implications

When you sell or redeem your mutual fund units, you may have to pay two types of costs: exit loads and taxes.

The profit you make when you sell your mutual fund units is called a capital gain, and it is taxable.

Short-term gains (held for less than 1 year) are taxed at 15%, while long-term gains (held for more than 1 year) over ₹1.25 lakh are taxed at 12.5%.