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5 checkpoints to sell your mutual funds

Last updated on: June 9, 2010 07:26 IST

5 checkpoints to sell your mutual funds

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Kunnath Santosh

Exiting a mutual fund is not so simple. This also requires some strategy or the checkpoints. For few, it may be just the gut feeling that drives selling, while for others it could be following neighbour's strategy.

Normally, our selling tendencies are aligned to the market -- selling when everyone's exiting the market. But trust me, no one wants to be on the losing side either by buying or selling at the wrong time. So let's look at some of the circumstances that demand selling or exiting funds.

1. Fund's loss exceeds expectation

Every investor should keep a stop-loss figure in mind. For example, if your fund loses 50 per cent in a year whereas its peers were just down 15 per cent, then it's an alarming signal. Believe it or not, there's definitely something wrong with your fund. On such occasions, exiting certain portion of the fund's units is recommended.

And if such bad performance continues for long, complete exit is advisable. Though your loss can't be recovered, but you can minimise your loss by acting proactively. The ideal strategy would be to keep a stop-loss figure in mind -- if my fund gains or losses XX per cent over a defined period, I will exit the fund.

The author is co-founder and director of Bangalore-based Perfios Software Solutions Private Limited. www.perfios.com is a personal finance software solution that provides a 360-degree view of your personal finance, with very little manual intervention.


Photographs: Rediff Archives
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2. Extraordinary return delivered by the fund

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If an extraordinary loss is painful, an extraordinary gain is also risky. If a fund has delivered 70 per cent return and its peers just gained 20 per cent, then also it's an alarming signal. This kind of extraordinary gain may have been achieved by divulging into some risky small cap stocks, which are volatile in nature.

Therefore, such funds could be highly volatile and the downside will be equally alarming. Hence, under such circumstances, exiting the fund won't be a bad idea. This way you can at least reap the reward in real terms rather than notional gains.

3. Change in the fund strategy

This also calls for a re-look into the fund. Especially because we buy funds after reading fund's objective or strategy, but if that very strategy is changed, the very idea of investing in that fund loses its value.

Post change in investing philosophy, it becomes a new fund.

And in that case, you can either stick to it or exit it based on the nature of the revised objective. This is also very important in case the objective changes very drastically, say from being a large-cap fund to mid-cap fund.

If you are a conservative investor, then you won't be comfortable taking higher risk. Hence, exiting the fund is advisable.



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4. Long-term underperformance of the fund

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Continued lagging performance is something which is hard to digest. If your fund has been on the losing end for a longer period of time, say, 2 or 3 years, then it's a definite time to say goodbye to this fund. After all, there is a limit to tolerate loses.

Long-term underperformance could be either because of fund's exposure to illiquid and dud stocks or due to consistence failure of fund manager's strategy. Under either case parting the fund is recommended. However, when the whole market is not doing well then it's another story.

But if other funds are performing not that bad and your fund is consistently underperforming, getting rid of it is an ideal option.

5. Your investment objective changes

Now that you have revised your overall objective, you may not find your current fund as lucrative as it was initially.
Your objective may change due to higher needs in future or higher liquidity requirements in the near future. Under either of the circumstances, you have to judge whether the fund will be able to meet your revised goal.

If the answer is yes, stay put with the fund. Otherwise exit and re-invest in the other fruitful avenues that suit your requirements.

For example, if your future needs demand more money at later date, you can switch from a balanced fund or debt fund to an equity fund.

However, you have to factor in the higher risk associated with the equities.

Conclusion

Exiting a fund is something that makes us emotional. But the fact of life is that rotten eggs should be gotten rid off as early as possible, so that we don't regret later on. Hence, we have tried to highlight few situations that call for re-looking into your existing fund and taking the necessary step.

But the truth is that no one can time the market. If you are thinking you can sell your fund at the right time reaping maximum benefit, think twice.

That's next to impossible. However, we can decide on the timing of the fund's exit based on the above situations. This will help you harness your overall investment skill and makes you a mature investor. Keep investing.



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