When to sell your fund

It is all right to invest in a fund, but also know when to take that crucial exit decision.

Jayesh Gandhi (name changed), Assistant Vice President of institutional sales business, working with a domestic brokerage house in Mumbai, exited Principal Global Opportunity Fund in January 2007. Since then, the fund delivered a 22 per cent return as against a 20 per cent of the Sensex, but Gandhi has no regrets.

Reason: the fund changed its investment mandate— from investing in developed markets to investing in the emerging markets. Says Gandhi: “The mandate of the fund didn’t match my diversification objective, which is why I moved out of the fund. I know that the earlier returns were low, but I wanted to stay invested in stocks of developed markets like US, which has a lower co-relation to India in these unprecedented times as compared to emerging markets which have a higher co-relation to the Indian equity market.”

Selling a fund is normally associated with churning as more often fund distributors pitching for new sales tend to compel you to sell your fund for wrong reasons. One should not churn between different mutual funds as funds should be long-term investments, but sometimes there are compelling reasons why one must exit a fund. Says Jayant Pai, Financial Planner: “Exit only if there is a dire need for money, or one can exit if an individual reaches his goal or if there is some material change in the fund. Otherwise, an exit makes no sense.” Here are 10 reasons when and why one should sell their funds.

Fund Manager has Changed

A fund manager can influence the overall structure and return of a fund. Therefore, if the new fund manager cannot deliver similar if not superior returns, one must look out for exit opportunities. However, a change in fund manager of passive funds like index funds should not worry investors.

A fund’s mandate is altered

Funds occasionally change their mandate. Consider the original reason why you invested in a fund. If the mandate of a fund has changed and no longer matches your investment objective, it’s time to exit than hold the fund. Franklin Templeton’s Opportunities Fund (earlier Franklin Templeton Internet Fund) changed its mandate from investing in upcoming technology companies to a diversified investment in stocks. Since March 10, 2004, when it changed its mandate, the fund has delivered nearly 265 per cent return, compared to a 198 per cent rise in the BSE Sensex. But for those who did not want a broad exposure but a sectoral exposure, exiting was the right decision.

Asset Allocation is Altered

As per financial planners, this is the foremost reason for selling a mutual fund. If the fund’s asset allocation does not match with what an investor desires, it is necessary to exit. After the SEBI changed the regulation defining an equity fund, where funds had to keep a minimum of 65 per cent of the total portfolio in equities to enjoy tax advantages, many balanced funds changed their asset allocation from about 50-50 debt equity to 35-65 debt equity. This changes the asset allocation of an individual and increases his risk due to the increase in equity exposure. At such times, if the additional risk is not comforting, exit.

Underperforms Benchmark

If a fund underperforms its peer in the short-term, you should not necessarily jump the bandwagon, sell your fund, and get into another. But when a fund is consistently underperforming its peers, year after year, you have to seriously think about your investment and take a re-look at how the fund is managed.

Don’t hesitate to sell even if one has to book a loss. Likewise, don’t time the markets. If your investment is in large-cap and the mid-cap stocks are outperforming, you don’t have to sell your mutual fund if it sticks to its mandate and continues to remain in large-caps. When large-caps return as flavours in the market, they will perform well. When studying performance, you have to look at your fund and compare it to its peers. When choosing a benchmark, you must select funds in the same category, and compare its performance within the asset class.

Size matters too

Size sometimes plays a critical role. Sundaram Mid-cap Fund performed consistently well till it started attracting larger inflows and as the fund’s size increased, it impacted its performance as the fund tends to pick more stocks in the portfolio.

Rising expense ratio

A rise in expense ratio can change the performance. Higher expenses reduce returns. In the case of bond funds or money market funds, it is highly unlikely that the fund can increase its returns enough to justify an increase in expenses. If loads are increased on equity funds, it reduces an investor’s corpus.

When funds consolidate

Fund houses may also merge occasionally and it is usually followed by a restructuring of the different funds among them—similar schemes are merged or one of them closed. This may change your fund manager and the style of the fund. At such times, study the changes and if it does not match your comfort zone, take the exit.

Re-balance your portfolio

Sell a fund to achieve the right mix of equities and fixed-income and the right types of funds in each category. One has to revisit one’s portfolio every six-to-12 months.

Change in personal situation

If you are at a certain important stage in your life, you may want to consider selling your fund. For instance, if you are near retirement, you may want to consider investing in conservative funds and reduce exposure on risky equity funds.

Booking profits

Timing the market is not advisable. But if there are indicators that your sector or the market has peaked, then an occasional profit booking is a good practice. You can re-enter the market once the selling is over.