Prasunjit Mukherjee

Knowing when to sell a mutual fund is one of the trickiest problems. If you have a 10-year-plus time horizon and invest strictly in index funds, the issue doesn’t concern you. But everybody else needs to pay attention.

Amutual fund (equity-based) is a basket of stocks and the ability of a fund to generate returns depends primarily on the efficiency of the fund manager to identify scrips to sell, hold or buy. But for an investor, the dilemma is how to match the fund manager’s perspective in handling the portfolio with his own requirement for liquidity, asset growth or risk management. After all, the outcome of the fund manager’s style, technique and vision has a big impact on the investor’s assets.

 

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So when does one sell a fund? The first no-brainer of an answer is, when it fails to deliver. But what is the indicator of its performance? Without going into the complex statistical model, the best thing to do is compare the fund with its stated benchmark. If the fund underperforms the benchmark for two consecutive periods, it is a clear sign to dispose it of. The period varies from person to person; my experience says three months is a good time. The exception to this rule is if the fund gets a new manager. The important point to remember is to act on the broad principle of rationale.

 

The second clear indicator is when the fund underperforms its peers. Today, any category consists of at least five funds. It does not make sense to hold on to a fund when its total returns are good but these have not been generated in recent times. I suggest a proactive approach and to keep one’s eyes open to its current performance, say, over the past year.

Also, sell a fund if its theme and style have adequate representation in the portfolio, even though the theme seems to have an enormous embedded value. It’s like putting all your eggs in one basket. Think of the technology funds some years ago, and infrastructure or real estate funds in recent times. When a theme fund goes up, the feeling is great, but what hurts is the downward plunge. The portfolio value erodes at a pace that is baffling.

If you follow the allocation model, the value of the fund is a signal in itself. If the equity value goes up steeply, transfer the extra returns from equity to debt, and do this once a month or every quarter. Recalibration has its limitations, but providing a simple workable structure has its advantages.

During market exuberance, a little culling is necessary to enjoy the fruits for a longer period. So, if in two years, returns worth five years of expectations have been generated, it is a good idea to prune your exposure. It is impossible to put a number to this, but you will develop the skill with practise. It’s equally important to sell a fund when you meet your goals. Wanting that 1% more may see you end up with a big loss.

A fund doing too poorly or too well can be replaced easily, either with one of its own kind or with a fund more in tune with the current market. Just don’t sell a fund for doing its job. That would be a mistake.

Prasunjit Mukherjee, CEO, Plexus Management