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When to sell a fund

You should tweak your portfolio and get rid of duds in line with the changes in your financial goals and investment strategy.

Tanvi Varma/Money Today | Print Edition: November, 2009

When it comes to spending large sums of money, we tend to invest a lot of time and effort in choosing the right product. Which is why we find it difficult to let go of our prized possessions, whether it’s a car that no longer runs, a house that’s falling apart or a fund that’s been losing consistently.

In general, the ‘buy and hold’ strategy works, but as Vikaas M. Sachdeva, country head, business development, Bharti Axa Investment Managers, says, it needs to be challenged occasionally. Exiting from a mutual fund requires analysis and constant monitoring, without emotional interference.

“Fund investments are based on financial goals; you follow a certain investment philosophy and allocate your assets in a way that they fulfil your objectives,” says Gaurav Mashruwala, a financial planner. For instance, if you are single, in your early 20s and your first goal is to buy a car, you might invest a higher percentage in equities. “Once you have reached your goal, even if it is earlier than you thought, it makes sense to sell your fund and actualise it,” says Dhirendra Kumar, CEO, Value Research.

It may be worthwhile to evaluate your investment strategy periodically to ensure that it meets your objectives at every stage of life. It could be buying a house, marriage, birth of a child, education or retirement. “If an investor’s objective has been met, it may be time to modify his portfolio, say, move to debt as he gets closer to retirement,” says Mashruwala.

“In order to know when to exit, you need to review your portfolio regularly, at least once every quarter,” says Sachdeva. Portfolio allocations can become skewed without you realising it. An allocation of 60:40 in equity and debt can change to 70:30 if your equity component gives a 50% return, exposing you to a higher level of risk. This would warrant some profit-booking from equity and adding this component to your debt portfolio.

However, Mashruwala cautions that a portfolio does not have to be rebalanced if it is up or down by only 10-15%. Rebalancing should take place only if the allocation has changed or is skewed beyond this limit, he adds. Kumar says that rebalancing should not be done only to time the market. Nor should you exit and reinvest in another equity theme to capture the next upside. Your investment follows a particular allocation strategy and may lose its meaning if churned constantly. “It may be wiser to invest in funds that give regular dividends, considering it is a taxfree element and an automatic profit-booking strategy,” says Sachdeva. However, exit if your cash flow is not enough.

Another reason to sell is if your fund has consistently underperformed its benchmark. According to Sachdeva, investors should study 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, he says. Benchmarking is an important factor in gauging a fund’s performance and determining whether it has kept up to its overall investment objective.

Krishnan Sitaraman, director, Crisil Fund Services, says that if selected properly, benchmarks can provide investors a perspective on the expected risk-adjusted performance of fund portfolios and help them take investment decisions. So, if your portfolio warrants investing in an index fund as a passive strategy, compare its performance with that of the index and not of its diversified equity counterparts. “Even if the index has underperformed, you should remain invested since it serves a particular purpose in your portfolio,” says Mashruwala.

There are, however, certain funds that have either underperformed their benchmark index consistently or have shown too much volatility. The JM HI FI fund, for instance, has underperformed its benchmark index for periods ranging from the past one month to the past one year. Others like JM Small and Midcap Fund and Fortis Fortune Leaders Fund, have done well in a roaring market, but the sharp ups and downs in their performance make them more susceptible to a longer recovery time when markets weaken.

Due to the pressure to perform, fund managers may invest in stocks to capitalise on specific movements, deviating from their original allocation. In such circumstances, investors should consider R-square, a statistical measure representing the percentage of a fund’s movement that can be explained by movements of the benchmark index. Investors must be sceptical about anything less than 0.80 (80%), says Mashruwala.

You may also consider exiting a fund if the management changes. The entry or exit of fund managers could have a bearing on your fund’s performance. “As long as the scheme objective does not change, you should wait for two quarters to see what the incumbent fund manager does,” says Sachdeva. Mashruwala supports this theory, and adds that there is every chance the new fund manager is better. In such a situation, remain invested.

Some investors prefer to exit if the fund size changes dramatically. Sachdeva believes that a very large fund is unwieldy. In many cases, fund managers proactively discontinue an investment in their funds if they feel they are unmanageable. Also, expense ratios, which range from 1.75% to 2.5%, can eat into your corpus. The good news is that there is a ceiling on fund expenses in India. So, funds cannot charge more, protecting investors from sudden spurts.

You make investments with an objective in mind. So, within equity, you might decide that a part of your portfolio should be invested in FMCG and pharma. But if your fund manager wnats to change the mandate of the fund and invest in unrelated sectors, it may be wise to re-evaluate your investment.

Sometimes funds change their names, investment philosophy or merge, either to attract more customers or get rid of a mandate that didn’t appeal to investors. This can disturb your strategy, but it does not warrant an impulsive sell, says Kumar. The recent merger of Kotak MNC Fund, Kotak Technology Fund and Kotak Global Fund into the Kotak Opportunities Fund works, as the objective of the fund has become broader.

Similarly, UTI Basic Industries was renamed UTI Infrastructure, but the investment objective remained untouched. The UTI Auto Sector Fund was renamed Transportation and Logistics Fund to broaden its scope and has delivered notable returns. “Investors can keep abreast of such changes by monitoring their portfolios and taking suggestions from financial advisers,” says Sachdeva.

Ideally, put your fund on a watch list before taking any decision. If the fund house is over a decade old, give it a longer time. Most important, Mashruwala says, if an investment does not suit your objective, exit without a second thought.

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