When should you sell a mutual fund?
What are the steps for you to take after buying mutual funds? Be mindful of the following cautions to avoid any wealth erosion
By Research Desk | Oct 11, 2018
Many mutual fund investors tend to think that once they have bought a fund, they can stay invested in it forever and wealth creation will happen. Alas, not all funds are meant for life-time investment. You must review your fund's performance periodically and decide whether it's doing well or not. Following are some scenarios where you may consider exiting a fund:
Fund's performance: If a fund has been consistently underperforming in its category or, even worse, in it's benchmark, that's definitely a red flag. However, you shouldn't exit a fund just because it underperforms in the short term. Even good funds with decades of history of outperformance can face temporary setbacks. In such cases, stay invested in them and wait for a recovery. You can use Value Research's star ratings to assess a fund's performance.
Change in mandate: If you have invested in a multi-cap fund which will now be operating as a mid-cap fund, that's another reason why you should consider quitting it. Similarly, a debt fund that changes its fundamental attribute and decides to invest more in lower-rated securities can call for an exit.
Change in fund manager: No matter what fund houses say about having a process-driven approach and as a result a change in fund manager doesn't impact the performance of the fund, the truth remains that fund managers have a decisive impact on its performance. In case of a fund-manager change, keep a close watch on the fund.
Change in ownership: Fund houses have their own investment culture, which gets reflected in their stock picks. If a fund house is acquired by another, its investment philosophy is likely to be impacted.
Overlap in holdings: You own two funds, Fund A and Fund B. When you check their stock holdings you realise that there is a significant overlap in their holdings. In such a case, you may want to sell one because you are not getting optimum diversification.
Personal reasons: If you need money, you will obviously liquidate your investments in the fund. Your goal for which you have been saving is near by, so you want to exit the fund or transfer the corpus to a debt fund from an equity fund.
You may also want to sell a fund if you have too many funds in your portfolio. It's okay to have four to five funds in a portfolio to attain diversification. Anything more than that number adds complexity to your portfolio.
If you realise that you have made a mistake by investing in a fund because the fund doesn't offer satisfactory returns, you can exit the fund.
Finally, avoid selling a fund just because it is showing some handsome gains. Held for the long term, equity funds have the potential of growing your money manifold. If you sell too early, you not only miss out on those gains but your goal planning may also suffer as a result.