When is it right to sell your mutual fund?- Business News

When is it right to sell your mutual fund?

Often you must have received advice on when to invest in a particular stock or a particular mutual fund? But you are seldom told when to exit.

  • Mumbai,  September 4, 2015  
  • |  
  • UPDATED   10:15 IST
When is it right to sell your mutual fund?
Picture source: Mail Today

When is it right to sell your mutual fund? How often have you received advice on when to invest in a particular stock or a particular mutual fund? But you are seldom told when to exit.

Exiting from a mutual fund requires deep analysis and constant monitoring, without falling prey to any knee jerk reactions. It may be worth your while to re-evaluate your investments in mutual funds every now and then to ensure that it meets your objective at every stage of life you are in. If your specific objective has been met, it may be time to modify your portfolio - move into more of debt as you are closing retirement.

The aim should be to use the money it was intended for. It must be methodical though; like systematic investing, one must also exit regularly. There may be times when your portfolio needs rebalancing. In times that we live in, portfolio allocations can get skewed to a large extent without you even knowing it.

An allocation of 60:40 into equity and debt respectively can change into an allocation of 70:30 if your equity component were to return 50 per cent; exposing you to a higher level of risk. This would warrant some profit booking from equity and adding that component to your debt portfolio. If you do not wish to do this on your own, balanced funds may be ideal since they re-balance investments regularly. "Balanced funds provide the benefit of asset allocation as well as tax efficiency", says S Naren, CIO, ICICI Prudential AMC.

You may need to exit a fund, if it has consistently underperformed its benchmark. If we look at data ranging from the last 3 months to 5 years, no one particular fund has remained the best performer throughout all the given periods. Having said that don't sell a fund because it is not in the top quartile. Watch the performance of a fund for four consecutive quarters before arriving at a decision, if there is no substantial improvement in its performance relative to its benchmark or peers, you may want to get out. Change in fund management may warrant an exit from the fund.

The last few years have probably seen the maximum entry and exit of fund managers and yes this could have a bearing on your fund's performance. Having said that, as long as the scheme objective does not change, you should wait for two quarters to see what the incumbent fund manager would do. Gaurav Mashruwala, a certified financial planner, supports this theory to only add that for all you know the new fund manager would be better. One could monitor the new fund manager's stock picks by studying the portfolio, the risks undertaken as well as his fund management style. Re-evaluate your investment if there is any change in the investment objective or fund philosophy.

Investment into a fund is typically based on the attributes of the fund and how that matches your investment objective. So within equity if you decide that a part of your portfolio should be invested into FMCG and pharma funds since they offer a defensive strategy, so be it. In this case, even if other categories outperform your fund, you should not be perturbed since it serves a certain purpose in your portfolio. But if suddenly your fund manager decides to change the mandate of the fund and invest into other sectors or stocks that are unrelated, it may be wise to reevaluate your investment. Funds have either changed their name, investment philosophy or merged themselves either to attract more customers due to the fancy towards a particular sector or to get rid of a mandate which didn't appeal to investors anymore.

Prima facie, this can absolutely disturb your portfolio strategy considering each fund has its own mandate and follows a strategic objective.

(In Association with Mail Today)