With the Sensex tottering at 13,000 levels, a whole lot of investors would be wondering if they should exit their mutual funds or stop their monthly systematic investment plans. While the latter does not make sense, especially if you are in good equity diversified funds, the former can be contemplated in certain cases.

Generally, getting into a mutual fund is associated with a long-term relationship whereby, there are good times as well as bad times. However, most investors are willing to enjoy the upside, but at the slightest hint of a downside, they start crying foul. Here we address the issue of when you should take the tough call of exiting your mutual fund.

Consistently poor performer: There are times when even a star fund manager will not be able to get great returns. Especially, in times like these, where all funds are sitting on cash simply because of lack of opportunities.

In such times, there is no point in accusing the manager. However, even in good times, if he is unable to perform, then there is a case for exiting such a fund. For instance, a fund that has the mandate to go all out in equities moves out when the market is on the upside is taking a wrong call, but remember it's only in hindsight that one can say that. But someone who does it consistently is going wrong somewhere.

One such example is HDFC [Get Quote] Prudence Fund. It has an excellent track record in the past, but has performed dismally in the last several quarters. One of the biggest reasons for this is the exposure to mid-cap stocks. So despite a lower exposure in equities (74 per cent) than HDFC Top 200 (95 per cent), it has performed worse than the latter. In the last one year, HDFC Prudence has returned -14.45 per cent (category average - 10.09) whereas HDFC Top 200 has returned -8.92 (category average - 17.25).

Follow the manager: Fund houses often promote the fund manager's performance and new schemes are launched using the star manager's name. However, when the fund manager shifts jobs, the fund house respond by saying it is process-oriented and individual stars do not matter.

For instance, when Sandeep Sabharwal was the fund manager at SBI [Get Quote] Mutual Fund, there was a lot of noise created about his midas touch during the launch of SBI Bluechip Fund. However, there was not even a murmur when he exited the fund house.

Luckily for SBI Mutual Fund, the incoming head of equities proved to be as competent as his predecessor. Though the entry/exit of a star manager should not be a criteria, reading the latest fact sheet will give you an idea whether the portfolio has been churned, in terms of stocks, sectors, asset allocation or strategy.

Size of the fund: Often this is a function of how fast the fund swells in size, the market situation and the fund manager's ability to deploy funds. Reliance [Get Quote] Growth continues to shine and deliver top notch performance even after the scheme had crossed $1 billion mark.

On the other hand, there are even funds that have a small corpus of Rs 100 crore (Rs 1 billion) and still deliver sub-standard returns. However, when the fund closes subscription because it does not know what to do with the additional money, it is an indication that you should take your money elsewhere.

Need money for a goal: This is one of the most important reasons to sell a fund. When you have achieved your targets or approaching one, you can move partially or even, the entire corpus to debt. Selling a fund at that point in time makes great sense because you are not exposing the corpus to any more risk.

Rebalancing your portfolio: If your equity allocation has exceeded the asset allocation numbers then you can either move some of your worst performing funds into debt/cash or  add additional funds to the debt part of your portfolio namely FMP's. It's best to undertake the asset allocation exercise as an annual ritual.

Before you press the sell button, take stock of the tax implications and exit loads, if any. And given that market movement are random and not in the hands of the investors, don't try to time your exit.

The writer is director, My Financial Advisor.