While most of us agree on what to look for when buying a fund, we often part ways on when to sell. The decision about whether to sell a fund is usually not clear-cut, even in hindsight.
You have to figure out if the fund can recover from its current funk and has any upside potential. Alternatively, it could be that it is on an unrealistic roll and it’s better to exit before it all starts going downhill. Or maybe, nothing to do with the above.
Here are three good reasons to sell your fund.
It no longer fits your need.
As your objectives change, your investments should change as well. Suppose you start investing in a balanced fund (one that splits its assets between stocks and bonds) with the goal of buying a car within the next five years. You may get married and your spouse may already own a house. Or, your parents may gift you a car. The company may allot a car to you. Or, at least give you a fat bonus which could go towards the car. Now you may decide to use that money for retirement instead. In that case, you might sell the balanced fund and buy an equity fund. Your goal and the time until you draw on your investment have changed. The investment should, too.
However, 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.
Its performance has raised a red flag.
Underperformance is a serious issue because it could jeopardize your chances of meeting your financial goal.
Although one year of underperformance may be nothing to worry about, it can get frustrating to watch your fund fall behind the competition for two or three years or more. Before cutting a fund loose, though, be sure that you’re comparing your underperformer to an appropriate benchmark and relevant peers.
Check to see whether the performance shortfall is a recent development or part of a sustained pattern of performance weakness. For example, a below-average 3-year ranking might actually result from just one off-year combined with two decent ones. It's a mistake to pull the plug on a fund based on short-term performance. In addition, you should conduct a thorough investigation on why the fund is lagging. Spend some time digging into whether the fund is merely undergoing a rough patch for its style or whether there's a more serious problem going on. All too often, investors bail out of struggling funds only to see performance rebound shortly thereafter. So check to see if the fund's manager is still in place, and that he is still employing the same strategy that brought your fund success in the past. Or have investors flooded your once-nimble fund with assets?
Believe it or not, strong outperformance may be an even bigger reason to consider selling than dramatic underperformance. That's because outsized gains can often indicate that a fund is taking big risks. If your fund is dramatically outperforming its peers, it’s probably taking on more risk to achieve that return. See where those outsized returns are coming from and determine if that could spell trouble.
It changed. Or you did.
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. A change in fund management could result in a different flavour. A fund that initially tilted towards large caps may now be a more mid-cap oriented offering.
This may not suit your risk profile.
Or, a fund may legally change its investment objective. It could also be a case of your scheme merging with another. N0t to mention, the assets of your fund house being taken over by another asset management company, or AMC.
All these could call for you offloading that specific investment.
Or maybe your fund didn't change--you did. Perhaps you've decided that a fund is simply too risky for you.
You may also decide that a fund was simply not a good fit for you --perhaps it's simply too risky. If you determine that a fund is simply too volatile for you to handle, cut your losses and move on, or at the very least sell the next time your fund rallies.
This is often the case with thematic or sector funds. Investors fail to understand the investment proposition and believe that they will always get spectacular returns. Not realizing that such funds tend to be volatile and could go for many years without delivering good returns. The point of investing is meeting financial goals, not to develop ulcers. If the volatility is giving you sleepless nights, then by all means sell.