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When to Sell A Fund

The most important reason for selling a fund is the same as the reason for buying it - your investment goal. Sell a fund only if- its portfolio does not suit you, the performance deteriorates, or there is a change in style or allocation of a fund or the change in management and service quality and above all your long-term investment goal.

Every other day, the market is hitting another low. From its high just about an year ago, built on a technology boom through the inspiring budget followed by another scam, the ban on badla, UTI crisis, economic slowdown, attack on America and now the imminent war in the neighborhood. The list of depressing market news seems never ending. The plunging index has not only eroded investor's wealth but also added a great deal to the anxiety. A year ago, I was often asked, what to buy? Now people ask -- Which of these I should hold? As one has made up his mind to sell all anyway.

What to do now?
Though it's impossible to predict what will happen to market as the events unfold. Indiscriminate selling will not help, and this kind of overreaction will lead you to sell at the bottom. Selling now will make sense if it turns out that stocks would continue to fall over an extended period. One can not predict if that's likely to happen, but it's far from inevitable. I don't know if the Sensex at 2600 is the bottom of the current bear market. But thinking about the long-term economic impact on the Rs. 22,000 crore Indian economy does not seem too great as compared to problems we're already facing -- the economic slowdown and retarding FDI. The crisis at its worst will be a short-term issue but not a long-term problem.

Uncertainty drives fear as well as greed. And investment decision solely based on either could hurt. Last year uncertainty powered greed. The current uncertainty is scary. We know well what happens when we buy, but don't know why. Likewise, if we sell in a panic without waiting to find out why, we are likely to throw away good investments in the process. Don't act on uncertainty. Go with what you know -- your plan based on your income and spending needs in desired time horizon and risk tolerance.

When to sell?
I am trying to articulate the key points to help you decide when to sell a fund. When to sell a mutual fund or any other investment has been given nowhere near the amount of ink as when to buy one. But the subject is important as more investors conclude that "buy and hold" may not be valid with many funds, and more so after this Unit '64 crisis. The decision becomes all the more difficult as unlike buying a fund, no fund manager will trigger a sell on his fund. Moreover, with the advent of open-end funds, which exist without a term, unlike closed-ends which naturally come to an end on redemption.

There are several factors that make selling a fund appropriate - a fund's unsuitability to your portfolio, a deteriorating performance, a change in style or allocation of a fund, a change in management and inefficient service. All the above factors are not in order of their importance.

The most important reason for selling a fund is the same as the reason for buying it - your investment goal. You should buy or sell funds solely on the basis of how they contribute to your long-term financial goal. Is your fund helping you achieving it? Even the best performing fund can qualify for sell if it does not suit your requirement. Your changing needs and feelings can drive a sell decision. Someone approaching retirement may wish to sell aggressive funds and put the money into more conservative investments. Sometimes it's time to sell a fund simply because you need the cash.

Taxes can provide another motive. Sometimes, taking a loss on a fund and switching to another can let the government share in the loss by providing an income-tax deduction. And it may be appropriate occasionally to correct for past over zealousness.

Sell when you just can't take it anymore. The point of investing is meeting financial goals, not developing ulcers. And if you do not have a stomach for the volatility, then by all means sell--as long as you'd never buy the fund back again. Review your own fund list and find the consistent laggards and if you own some, find the exit route.

One should sell, of course, if the fund is doing badly because it is not sticking to any discernible style. Investors who buy a fund because of the way it claims to invest should first consider whether or not the fund is doing what it said it was going to do. If the fund is not following its charter the investor must approach the sell decision from a different angle, questioning instead the viability of the investment concept itself.

Investors who buy a fund for a specific purpose should always sell when the fund is no longer satisfying that aim. Investors should always sell a fund when their own goals have changed. This is easy to overlook, especially if a fund is performing well.