When to Sell a Mutual fund

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F or most investors, especially those with equity exposure and long term perspectives, buy-and-hold is the easiest strategy and one that has proven effective on a historical basis. What buy-and-hold really means is staying the course through short-term market dips. However, there is a time when selling a fund is not so bad an idea. Remember though mutual funds are bought to be held, to hold for a lifetime, if possible. But you obviously don’t want to marry your mutual fund, as things may change even if you are a long-term investor. There are times to admit a mistake and go on with your life.

The reasons to sell a fund can be two fold, those related to you as person, who has a definite investment objective in mind as well as a certain risk tolerance and of course reasons related to the fund’s management and its performance.

Coming to some You related reasons-

First and foremost is the reason- why you bought the fund in the first place. If it is not fulfilling its purpose or in case it has already fulfilled its purpose, it may be a time to sell. Was it for the medium term, long term or short term, depending upon what type of fund it is? In case you had bought it with a shorter term horizon in mind, say to finance your new car, or sofa etc-go ahead and sell, but not at a loss of course. Also in case the appreciation you had expected has happened in a shorter while than expected then it doesn’t matter so go ahead and sell. Taking the reverse side into account, in case you had bought for long term so as to cream capital appreciation. or for its past dividend record and it has slipped up, then there is no reason for you to hold the same.

Secondly has there been a change in your personal circumstances or investment objective. If you are now in a different stage in your life where you are getting closer to retirement, you might want to sell that aggressive growth fund for a more sedate growth and income fund. Evaluating your fund’s performance — along with your financial situation — every year is the critical first step in your decision-making process.

Thirdly again depending on your investment life cycle stage in case your long-term goals have now become short-term, shifting assets to more conservative investments may be required, so there is no harm in shifting from equity funds to debt funds.

Lastly are there changes in your risk tolerance, so there is a mismatch between your and the funds risk profile. The change in the risk profile could have happened due to change in personal circumstance/fortunes, or due to age, change of job etc.

Then of course there are the Fund related reasons why one would want to sell their fund units. Firstly is the comparison of the fund vis a vis itself. Obviously a fund should be sold due to poor performance. Be careful not to sell a fund because of poor short-term performance. One bad quarter or even a sub-par year isn’t sufficient justification to ditch a fund, especially if it has a good long-term performance record. Usually two to three years of unexplained or dramatic underperformance are appropriate indicators.

Then comes the comparison vis a vis others, of course selling funds that underperform their peer groups can lead to slight improvements in portfolio returns. It is important to base your decision on relative performance. You should compare the fund’s performance against other funds which have similar investment objectives or strategies. For example, if your growth fund lost money in 2000, say -10%, this may not be such a bad thing if the index lost -15%. Also, when evaluating fund performance, make sure you compare your fund with the most appropriate peer group. Comparing apples to apples is the only fair way to see if a fund is doing well or underperforming.

In case there has been a change in the fund’s investment objective or strategy you are justified in selling. If you bought a fund for exposure to large blue-chip companies and all of a sudden it starts buying small start-ups, that’s a definite red flag! Or if you bought a fund that buys undervalued companies and it starts buying companies at any price whose earnings are growing rapidly. another red flag.

Change in man at the helm is always an uncomfortable thing. If a fund manager who is responsible for the performance record of the fund decides to leave for greener pastures, that may trigger an alarm. If this is the case, don’t automatically sell. Give the new fund manager time, particularly if they have a similar investment philosophy as the previous manager. If fund performance starts to falter after a year or two, it may be time to get out. If the new fund manager has a different investment strategy, you may consider selling.

Sometimes funds become -ouch! too expensive. When a fund expense ratio rises significantly, particularly in bond and money market funds. Increases in fees to the manager represents a reduction of income to you and is unlikely to be offset by higher returns. Look at moving to a lower-cost alternative where expenses will not be a principal factor in the fund’s performance.

So remember always do your homework and keep track of the market. Review your fund price every day and evaluate your portfolio every quarter. Happy hunting!

Aru Srivastava

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