When to Sell

While there is a fair amount of unanimity on what to look for when buying a fund, opinions differ radically when the subject switches to redeeming one's units. Buying the right fund is as crucial as offloading the investment at the right time. But the predominant reason an investor would sell is solely dependent on his personal situation. Once the fund has delivered, he wants to book profits and rightly so. Alternatively, he could be in dire need of cash.

Here we tell you what other factors you should look out for to make sure you are on top of your portfolio.

Change in Mandate
Smart investors buy a fund with a particular purpose in mind. The fund must add value to their existing portfolio. It should complement the core holdings and not replicate them. So while the purchase of a scheme is made with every good intention, for no fault of the investors, it may turn out to be an ineffective choice simply because the fund house decided to tamper with the original mandate.

Of course, the decision is not made arbitrarily according to the whims and fancies of the investment team. There will be a genuine rationale behind that move. A prime reason could be that a thematic offering made sense at a particular time but has lost its flavor over the years. For instance, ICICI Prudential Power was launched in 1994 with the objective to invest only in the core sectors of the economy - Energy, Construction, Cement, Engineering, Software and Banking. In 2003, the mandate was modified to also include Consumer Durables, Consumer Non-durables, Pharma and Healthcare. Hence, for all practical purposes this thematic fund began to resemble and operate as an equity diversified fund.

When UTI Mutual Fund began its revamp a few years ago, there were two schemes that were targeted for a change in mandate. UTI Petro changed its positioning to focus on the Energy sector and the investment universe included sectors / sub-sectors of Power Generation & Distribution, Oil Downstream & Upstream, Capital Equipment Manufacturing, Pipe Manufacturing, Gas Distribution etc. The transformed version was called UTI Energy in 2007. UTI Auto shed it narrow mandate and became UTI Transportation and Logistics. The investment universe now comprises sectors / sub-sectors of Auto, Auto ancillary, Railway, Ports, Airports, Roads, Shipping, Courier, Logistics and ancillary sectors catering to the theme. Incidentally, this fund has delivered stellar returns in the recent past.

Then again, in their eagerness to capitalize on a sector which is riding on a momentum and in the bargain increase their assets under management (AUM), a lot of sector or thematic offerings could sprout. If the sector does not stand the test of time, then change is inevitable down the road. The Tech boom which took the world by storm in 1999 to 2001 is one such example. In 2003, Birla IT transformed itself into Birla India Opportunities Fund. Birla IT was a star performer in its (tech) category, but in its new avatar it does not offer too much of value.

One scheme that has probably irked investors is Chola Opportunities Fund. Born in 1998 as Chola Freedom Growth Fund, it was a diversified equity fund. It changed guard early 2000 to become a pure technology fund - Chola Freedom Technology. In 2003, it was then re-oriented once again to Chola Opportunities Fund, where apart from Technology, the new orientation would also be towards companies belonging to sectors where India has strengths in global markets such as pharmaceuticals, textiles, gems and jewellery, and auto-ancillaries.

The examples of tech funds changing garb abound. IL&FS eCOM, another tech fund, broadened its mandate under the new name IL&FS Global India Fund to scout for companies that have the potential to emerge as global players in their respective sectors. While Franklin Internet Opportunities turned into Franklin India Opportunities.

Tata Select Equity Fund is another example of a fund whose objective has changed frequently. Initially a core sector fund, it became an IT fund in December 1999, only to switch again to being a select sector fund. Finally, in August 2002, it became a regular equity diversified fund.

It would be worth noting here that the official mandate may not change but the fund's investment objective may no longer suit you. Magnum Contra, for instance, was known for its bold contrarian views once upon a time. Over the years, it has mellowed into a diversified equity fund.

When the investment mandate of your fund is altered, you have to objectively decide whether or not it still adds value to your portfolio.

Change in Fund Management Style
Some AMCs, like Fidelity Mutual Fund, tend to lay tremendous amount of stress on processes. This does bring some amount of comfort to investors who know that if the fund manager moves out, there will be continuity of the investment process and the scheme will not be too badly hit. While no one's denying that, neither can one ignore the role of a fund manager in an actively managed fund. Processes are great for managing risk, they not replace gut feel nor do they build conviction. But do investors really understand what they opt for when they get into a fund? Keep a tab on your fund manager's investment style. If he has gotten a little too aggressive for comfort, it's time to make an exit.

Take the case of Samir Arora, CIO, Alliance Capital Mutual Fund. Arora took the fund house and its investors to dizzying heights during the tech rally in 1999-2000. Alliance Equity Fund (diversified equity fund) and Alliance 1995 Fund (balanced fund) figured among the leading funds during that time. He did it by taking concentrated bets, frequently churning his portfolio and buying into illiquid stocks. In fact, a joke doing the rounds at that time stated that “once Samir Arora gets into a stock it becomes liquid only to drop once he gets out of it”. At that very same time, Bharat Shah, CIO, Birla Mutual Fund, pretty much followed the same style. When asked about his strong bets, he was quoted in the press saying that “investing is not democratic where every sector and every stock should be given ample representation. If I am convinced about a stock I believe that it should form a reasonable part of my portfolio. If you go with the attitude that you like it but don't want to rise with it, it's a defeatist approach.”

Despite both fund managers flirting with danger, investors turned a blind eye and were pleased with the scorching performance. When the tech rally fizzled out, these funds were among the hardest to fall. The aggressive investment style that drew in the accolades brought about the funds' downfall. Bharat Shah quit Birla Mutual Fund in 2000 and Samir Arora quit Alliance Capital Mutual Fund in 2003.

More recently we had Sandip Sabharwal who rose to fame in SBI Mutual Fund. He achieved quite a fan following and it was due to him that JM Mutual Fund, where he moved to as CIO, managed to beef up its assets. Sabharwal was a growth investor who also believed in tight portfolios and riding his convictions. His flagship fund JM Basic was the best performing equity fund in 2007 with a return of 111.44 per cent. Once he left JM Mutual Fund, unfortunately for investors, the portfolios were shuffled and they lost out. Had he been there during the entire slump of 2008 and when the market began to pick up in 2009, he might have salvaged the portfolios from the current mess they are in. On the other hand, when Birla Mutual Fund bought over Alliance Capital Mutual Fund, the new management kept Arora's portfolios untouched for next two years so that his picks could unravel.

Keep tab on your fund manager's style. Is he getting too aggressive in his stock or sector bets? Is he tilting heavily towards smaller cap companies when the fund originally had a large cap tilt that made you happy? Has he delivered an eye popping performance recently that makes you want to pull out your money and exit with a smile? Don't ignore these red flags.

On the other hand, there are fund managers who balance their conviction with the peer group positioning. One fund manager, on the condition of anonymity, stated that he looks at the benchmark components and the competitive positioning. Here's what he says: “If the weight given to a stock in the index is 7 per cent and I go with 4 per cent, I have a strong chance of underperforming the benchmark. If the average holding by the peer set is 8 per cent, then one might as well bet higher on the stock to be able to generate a higher return. If I am negative on the stock and the average peer holding is 3 per cent, then I totally stay away from that stock. In this way, I am well aware of the risk being taken; of how much the gain could be or how much the loss could be.” His logic is clear; we live in a relative world and are judged by relative performance. So one has to be aware of the risk taken relatively with respect to benchmark and peers. While those who prefer to brashly ride their convictions might scoff at him, his style is what probably suits most investors.

There is no right or wrong manner to run a fund. What matters is whether it suits you. An aggressively tilted portfolio might be great if the other funds in your portfolio are large cap tilted relatively safe offerings. But it may not be a good bet for another investor. You, the investor, must be extremely comfortable with your fund manager's style. Should he move out or is no longer handling that fund, check to see whether or not the approach of the new person at the helm differs radically. Accordingly, make your move or stay put.

Change in Ownership
A fund manager's change of style or him moving out altogether can have a tremendous impact on the portfolio. But investors should also look at the change in ownership. It could be a brand new management or a new partner hopping on board.

When UTI Mutual Fund took over the schemes of IL&FS Mutual Fund in 2004, investors were certainly not overjoyed. And rightly so. But UTI Mutual Fund has been able to transform itself into a competent and professional mutual fund company much better than anyone expected back then. Now American mutual fund company T. Rowe Price taking a 26 per cent stake in UTI Mutual Fund is good news for investors. If you are happy with the way your schemes in UTI Mutual Fund are performing, there is no reason to sell.

Similarly, in 2007, Robeco, the fund management arm of the Dutch co-operative bank Rabobank, took a stake in Canbank Mutual Fund. Canara Robeco Mutual Fund now has a brand new team with some great schemes in place.

Investors must get accustomed to the fact that mergers, or takeovers, are very much a part and parcel of the mutual fund industry dynamics. As the environment gets more competitive, consolidation will take place and the loss making ones will scout around for buyers. Or even those that want out for their own business purposes. When change in ownership happens, investors need to take a good look at the pedigree of the new owner as well as who comprises the new investment team. Most recently, in November 2008, Religare Enterprises acquired Lotus AMC which was renamed Religare Mutual Fund. Besides a few fund managers being retained, the Chief Investment Officer of Lotus Mutual Fund, Tridib Pathak was not taken on board and he later joined IDFC Mutual Fund. Vetri Subramaniam, who was already the CIO at Religare Aegon Asset Management Company took charge. Investors would be wise to keep tab and see how this fund house is faring.

Even if there is no doubt as to the reliability of the new AMC, the very investment style of the fund house could differ. Back in 2004, Alliance Capital Mutual Fund was taken over by Birla Mutual Fund. When that took place, the investment team of Alliance Capital Mutual Fund was not retained and the immediate impact was a period of under performance.

Continuity at the helm is assuring to investors, in some instances. In the case of Pioneer ITI Mutual Fund selling off their asset management business to Franklin Templeton Mutual Fund in 2002, all the incumbent fund managers were retained and are still around.

When HDFC Mutual Fund bought over Zurich India Mutual Fund in 2003, they only retained Prashant Jain in the fund management team. Investors who stayed on would have been happy. That year, Principal Mutual Fund acquired all the schemes of Sun F&C Mutual Fund. This move came soon after Principal Mutual bought out the IDBI's entire stake in the erstwhile IDBI-Principal Mutual Fund. They then proceeded to merge some of the schemes of Sun F&C with those of Principal.

Performance Issues
This might sound a bit illogical, after all who complains about great returns. But if your fund has delivered, say 110 per cent, while its average peer is up 20 per cent, take a look at the portfolio to see what it is you own. If it makes you uneasy, sell. On the other hand, if the average return is 110 per cent but you have to make do with 20 per cent, be alert.

Having said that, equity investors must hang on for at least three years to ride various market cycles. Besides, it's impossible for the fund manager to hit home runs every single year. There will be times when the performance is not up to the mark. Also, it could be a deliberate call taken by the fund manager not to ride certain sectors. For instance, HDFC 200 hit a rough patch in 2006 and 2007 but stayed loyal to its investment approach. Come 2008 and 2009, the fund silenced all critics.

The reason to redeem must only be due to consistent underperformance, either vis-à-vis the benchmark or the category average. Don't compare a large cap fund with a mid cap fund, or a thematic fund with a diversified fund. Make relevant peer group comparisons.

Over here we would like to speak of our star ratings. These ratings are not a signal to buy or sell but an indicator to point you in a particular direction and to help you separate the wheat from the chaff. The rating is based on the risk-adjusted return of the fund. So if you buy a fund based on its 5-star rating, don't sell when it drops to a 4-star. Since the ratings are calculated every month, the drop could reflect short-term performance shifts. To cite an example, ICICI Prudential Dynamic bagged a 4-star rating in 2007 which dipped to 2 stars simply because the fund manager turned defensive and took huge cash calls. It has bounced back to 4 stars. But if a fund has consistently been showing a drop in its rating and is languishing at a lower star, then it's time to take a second look.

Stock Overlap
This is a high possibility if you pick up more than one scheme from a single fund house. For instance, Templeton India Equity Income and Templeton India Growth are not only from the same fund house but are even managed by the same fund manager. Their equity portfolios are very similar, the difference being that the former has the mandate to invest up to 35 per cent of its portfolio in stocks listed abroad. Similarly, the equity portfolios of HDFC Prudence and HDFC Equity too resemble each other. If you find yourself saddled with more than one scheme from the same fund house and the same fund manager, take a good look to decide if one has to be redeemed.

When you are the reason
The logic behind exiting a fund is not always due to external factors

The need to rebalance
Should your portfolio show a significant deviation from your stated asset allocation, it would require you to sell units of a fund to rebalance. Sell the one that would not have any tax impact and the one that you are most unhappy with, given the 'external' factors mentioned.

Cleaning up
After accumulating funds over years, it is possible that one's investment portfolio may get too cluttered or there may be a lot of duplication. One would need to exit some funds totally to maintain a healthy portfolio.

The need for money
If you desperately need money, sell.

Achieved objective
If you invested with a targeted return/amount and have achieved it. Or have accumulated sufficient funds for your goal, consider exiting the fund and putting the money in a less volatile asset.

Misunderstood investment
Investors may buy a scheme and realize that it was not what they were actually looking for. For instance, they may buy an infrastructure fund only to find it replicating a diversified equity fund portfolio. Or they may buy a Monthly Income Plan (MIP) with the assumption that they would get a dividend every single month, not realizing that such guarantees are not offered. Or it could be that the dividend plan of a fund never offered a dividend. To cite an example, had you invested in the dividend plan of Principal Personal Tax Saver at the time of its launch in 1996, you would have got your very first dividend in 2005!

Change in mindset
An investor might have been bullish on a theme or sector at one time but no longer has the conviction to ride it. In that case, it makes sense to opt out of that specific scheme.