There are many fund managers, stock brokers, and financial advisors that provide guidance on buying mutual funds, and other investment assets. However, very few discuss aspects on selling or rather very few know when to sell investment assets and cash in the profit or limit the loss.
Mutual funds are funds operated by a fund manager from an Asset Management Company (AMC). The fund invests in a portfolio of stocks based on the objective and strategy. The objective can be to provide income, growth, or both. The fund follows an overarching theme that guides the investment. The theme can be based on market cap, sector, growth and value stocks, new age stocks etc.
Investors buy and sell mutual funds because it provides better risk control mechanism than investing in stocks. It also provides diversification at an economical price which would have been impossible replicating by investing in individual stocks. Let’s discuss when investors should sell the mutual fund.
A change in the fund manager
A fund manager plays the most crucial role in the performance of mutual funds. If a mutual fund is doing very well under a fund manager, change of fund manager may disrupt the performance. The fund manager may change for various reasons like leaving the AMC, opting for other funds within the same AMC etc. In such cases, observe the returns for a few quarters and if it deteriorates, investors can think of selling the fund.
Change in fund manager may not always impact the performance. For example, index funds which track a benchmark index will do what the underlying index does irrespective of the fund manager.
Change in strategy & objective of the fund
Investors select mutual funds for investment based on the objective of the fund as well as their financial goals. If a person needs income from the investment, he or she may like to invest in funds whose objective is to provide regular income by investing in dividend paying stocks and assets that provide monthly returns. If the fund manager suddenly starts investing in growth stocks and bets on price appreciation, the fund is not serving the investor achieve the intended financial goal. This could be the time to liquidate the mutual fund.
Similarly if the mutual fund changes the way it allocates funds to different assets, this may be a sign to re-evaluate your investment. If the change doesn’t serve investors’ financial goal, they should come out of it. For example, if a fund adopts a balanced strategy where it invests 50% in debt and 50% in equity suddenly changes the mix to 40% in debt and 60% in equity, this may expose investors to higher risks.
Underperformance for a long time
Typically equity oriented aggressive funds and balanced funds are long term investment assets and hence investors should give some time to their investment to achieve returns. However, if the fund underperforms year after year, it may be a sign that the investors should opt out.
Investors should, however, not look at short term performance and take temporary fluctuation in returns as fundamental flaws in the fund. Any mutual fund, irrespective of the businesses behind it, can face temporary fluctuation. Investors should observe fund performance for a few years and decide accordingly. To judge return of the fund, Investors may compare the returns with similar funds or a benchmark index.
For example, if investors have invested in Franklin FMCG Fund (Growth) and wish to evaluate the performance, they should see the absolute performance for last 3-5-10 years. They can also compare returns with funds like ICICI Prudential FMCG Fund (Growth) which has similar attributes. Investors can also compare returns with Index fund such as Birla Sun Life Nifty ETF.
Conclusion
Mutual funds are the best way to invest in a portfolio of sound companies without having to invest in individual companies. Investors should not sell their mutual fund because of short term volatility. Study the alternatives, fundamental changes in the fund, and pro & cons before deciding to sell.