With the volatile markets, and the Sensex slipping below the 18000 level, the question running in everyone’s mind is whether to stay put or rush for the door.
Is it time to sell your investments?
Before you consider exiting your mutual fund investment/s, one of the important questions to ask yourself is the reason for buying this particular scheme. I am sure there might be several reasons but for most people it is “High (Highest) Returns”. This reason can easily fizzle out as it is very difficult if not impossible for schemes to consistently give high(est) returns. Some of the funds have performed consistently well in both up and down markets and have demonstrated their ability to be in the top quartile of funds, but there may be instances where these funds lag the market for various reasons.
Here are 6 such times when you should consider selling your mutual funds.
1. Poor Performance
The first and foremost reason for quitting any investment is that the fund has demonstrated poor performance. Infact this should be the last reason to consider quitting a scheme. First analyze the reasons for poor performance and the period over which the fund has demonstrated poor performance. Is it that the fund manager has taken some stock specific or sectoral calls that have gone wrong? Are some of the stocks out of favor currently? After all the reason that you have opted for a scheme is the track record of the fund manager in managing the scheme in good and bad times. So as long as there is no change in the fund manager you need to take stock whether underperformance for a few months warrants exit from the investment.
There are times when a star manager /fund management team will falter. You should not penalize the fund manager for sticking to the investment mandate of the fund. After all, this is what you would expect from him. However if he does not stick to the investment mandate of the fund but takes calls that he should not be taking, then one can look at moving out. For example someone who is mandated to be invested in equities at all times moves out when he takes the view that the markets are overvalued at 12,600. Since then the markets have delivered 20% and investors have lost on this opportunity. Well you can argue both ways that being in cash is a better strategy or not, a scheme that is mandated to be invested at all points should just do that.
For example Sundaram Select Mid Cap Fund has had consistently more than 22% in cash and this seems to have dented returns. One could attribute the high cash levels to a lack of conviction in the market or the belief that one can time the market. Both these reasons are detrimental to the future performance of a fund.
Keep an eye on the scheme whether it under performing continuously for a couple of quarters. If the fund doesn’t recover after several quarters of underperformance you can look at exiting the fund.
2. Follow the Manager
Fund houses often promote schemes that have done exceptionally well and the fund manager is accorded godly status. The scheme is then aggressively marketed and subsequently new schemes are launched using the star manager’s name. Then suddenly when the fund manager departs, the fund house is quick to do a volte-face and retort that we are a process oriented fund house. The fund house cannot have it both ways. So one needs to be careful of the statements a fund house makes.
When a fund manager departs, check whether a competent fund manager with a consistent track record has stepped in. Also check if the fund manager sticks to the investment strategy of the fund or deviates from it. Reading and a finer analysis of the fact sheet will give you a sense whether there has been a churn in the portfolio in terms of stocks , sectors , asset allocation or strategy.
If a team of fund managers manages the scheme, one exit will not disrupt the fund and hence you should stay put and evaluate the investment for two quarters. However if there is an experienced fund manager who comes in the picture, you can look at opting for better options.
3. Size of the Fund
Size of the fund could have impact on a scheme’s returns. Funds such as Reliance Growth, HDFC Equity continue to shine even with a corpus of 3900 and 4400 crore respectively just as they did when they were much smaller in size. However funds such as SBI Magnum Global and Sundaram BNP Paribas Select Midcap seem to have tapered down under the pressure of too much money. This is particularly true for small and mid cap funds as it is difficult to move in and out of such stocks quickly.
A look at Sundaram BNP Paribas Portfolio shows around 115 stocks. This shows that there are several marginal ideas besides some excellent ones. When the fund does not know what to do with the new money that comes in, it’s generally time to exit the investment and take it elsewhere. Whether it has 5 star rating or not is immaterial. A fund has got a 5 star rating because of its past performance and not because of its future performance. So 5 star or not, it’s time to look at the door.
4. Are your investments really diversified?
Having many funds does not mean you are diversified as funds often have similar kind of stocks in one’s portfolio. You can sell most of your funds if you find yourself in such a situation and keep only two funds with a good track record in each category diversified across fund managers, houses, type of stocks, sectors and style of investing. So take a hard look at whether a fund really complements your portfolio and exit where there is significant overlap between the funds.
5. Need Money for a Goal
This is one of the most important reasons to sell a fund. When you need money for a fund and you have achieved your targets, you can move partially 50% in debt or 100% depending on the market outlook. Since it is often difficult to time the markets, it is better to sell your fund and move into debt 6-12 months before you need money for a goal.
6. Rebalancing your portfolio / Moving into Cash or Debt
In today’s market, your equity allocation would have exceeded the figure that you like to have as a part of your portfolio. If this is the case, then you can either move some of your worst performing funds into debt / cash OR add additional funds to the debt part of your portfolio namely FMP’s. It’s best to undertake the asset allocation exercise as an annual ritual.
Finally before you select the sell button to click, take stock of the tax implications and exit loads if any. If you can save tax by being invested for a few days or months, it makes sense to wait and then sell on completion of 1 year. However sometimes it’s good to exit (at the cost of paying short term capital gains tax and exit loads) if you have made substantial profits in a very short period of time or if the scheme is in deep trouble.
Anvi
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*It was a miracle, a wish so true*
* to hold you in arms and see you*
* your twinkling eyes and beautiful smile*
* filled our heart with love and pride*
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5 years ago
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