While most of us agree on what to look for when buying a fund, we often part ways on when to sell. Having said that, there are numerous situations that demand that one hits the sell button. Let’s look at five of the most prominent ones.
- Your investment goals change
Investments are done with the sole purpose of achieving goals. But goals are susceptible to change.
Let’s assume you are investing in a balanced fund with the aim of buying a car within the next five years. Surprisingly, fortune favours you and your company allots a vehicle to you. Would it not be wise to instantly deploy that saving to another goal, say retirement? In that case, you could offload your units in the fund and channelize that money to an equity diversified fund. The longevity of the goal has mandated a different investment.
Talking of longevity, some portfolio shifts are needed even if the goals stay constant: When saving for retirement, as you get older, gradually reduce your exposure to stocks and increase your stake to hybrid or fixed-income investments. Or, you may decide to retire five years earlier than planned. Naturally, your investments should be adjusted accordingly.
- Your portfolio needs rebalancing
Let's say you started off in 2002 with a portfolio that had equal weightage to large- and mid-cap funds. By the end of 2007, your portfolio would have been anything but balanced simply because mid-cap funds outperformed large-cap funds by a significant margin at that point in time. Ditto if you started off with equal weightage to debt and equity. Equity would have crushed debt at that point and your portfolio would be heavily tilted towards equity.
Prudence requires that once a year you rebalance your portfolio. Change the lopsidedness to bring your asset allocation back in line with your goals. If a particular fund has gone wild, you could start there.
You may welcome change, but don’t be too enthusiastic if it does not mesh with your investment objectives.
A fund could change its investment mandate and you may not subscribe to the new one. Believe it or not, some funds do morph into a different product over time. In April 2008, UTI Auto Sector Fund changed its investment objective and was subsequently renamed UTI Transportation and Logistics Fund.
It could also be a case of your scheme merging with another. In February 2012, Tata Mid Cap Fund and Tata Capital Builder Fund merged with Tata Growth Fund.
Or, it could be the case of a fund manager change and from, say, a multi-cap preference of the original fund manager, it is now heavily tilted towards mid caps.
Closely related to changing fundamentals are misunderstood fundamentals. If you buy a shirt that doesn't fit, you return it. Sometimes investments too need to be returned, so to speak.
Investors who failed to understand the investment proposition offered by a sector fund and believed they were investing in a ‘low-risk’ investment avenue should sell once they realize their mistake.
Let's say you invested in a banking and financial services sector fund which delivered phenomenal returns in 2007 only to slump in 2008, and once again tumble in 2011 only to zoom ahead in 2012. The point of investing is meeting financial goals, not developing ulcers. If the volatility is giving you sleepless nights, then by all means sell.
The best way to avoid such situations going ahead is to be a finicky buyer. Research your investments thoroughly.
This is a serious issue because it could jeopardize your chances of meeting your financial goal. While one year of underperformance may be nothing to worry about, two or three years of falling behind can get frustrating. However, before pulling the sell trigger, be sure you're comparing your underperforming mutual fund scheme to an appropriate benchmark index and relevant peers.
