Not all Mutual Funds are for the long run. Here’s what you should watch out for to see if you should sell or hold your funds.
Everything is rated today. Mutual Funds are no exception. Many institutions award Mutual Funds star ratings. Obviously, a 5-star rated fund is the best of the lot. So, if you choose a 5-star fund you have nothing to worry about, right? Wrong! The so-called ‘five star’ Mutual Funds do not remain at the top forever.
Funds are subject to changes just like any other investment. Sometimes, their performance drops. Or their managers leave. Or their strategies change. That’s why funds need to be monitored from time to time. But it is impossible to keep looking at them constantly. Here’s where we help.
Additional Reading: How To Pick Good Mutual Funds
There are certain ‘SOS’ signs that you need to look out for. As you know, where there is smoke, there could be fire! But note that these signals may not always be ‘sell’ signs. These will help you check if you need to sell or hold.
Asset Size
People always like to buy the best products whether it is food, the latest fashion outfit or a gadget. Mutual Funds are no exception! All investors want to invest in the best funds that have given the best returns. As more investors invest in that best fund, the assets of the fund become big. Obviously! So what happens? Just like a heavy-laden lorry cannot outpace or outmanoeuvre a sleek race car, a fund with a big asset size cannot trade as quickly (in the stock market) as a fund with small asset size. So funds with a big asset size become ‘slow’. Their returns come down from ‘high’ to ‘average’.
This is precisely the reason why some funds may decide to stop accepting new investments when their assets become humongous. So, you should keep an eye on such funds so that you don’t find out one fine day that you are not getting as many returns as you thought you would.
Fund Manager Changes
There may not be a woman behind every successful man, or vice versa. However, we can say with confidence that behind every successful Mutual Fund there is an efficient fund manager. They’re the ones who decide what to buy, what to sell, and when to do both. So they are the ones who are responsible for the performance of the fund.
Investors often wonder whether they should exit from a fund when the fund manager leaves. Should you exit? Well, it depends on a lot of things.
Number one – the taxes, of course. You may have to pay taxes when you sell your Mutual Fund units if you incurred a capital gain, and there is no guarantee that the returns from the new fund you are going to invest in are going to make up for the taxes.
Number two – the new manager may be as good, if not better, than the old one.
Last but not least – some types of funds are not as affected by manager changes as others. Index funds are the best example. Managers of index funds are not picking stocks. They simply follow a benchmark index. So manager changes for index funds are not as important as manager changes for an actively managed equity fund.
You need to look closely to find whether the manager of the fund was extremely good at stock picking and exit strategies. You need to think about it only when you know that the fund manager who left was solely responsible for the performance of the fund. Also, worry if such a good manager is from a fund family that isn’t very strong overall.
You needn’t worry at all if the fund house (from which the manager leaves) has many talented managers and has an excellent track record for most of its funds.
Additional Reading: Set Your Goals Before Investing in Mutual Funds
Mergers and acquisitions
The fund house from which you have bought funds may merge with another fund house or it may be taken over by a bigger fund family or it may enter into a partnership with some institution. Should you be concerned? Yes. It may seem like these are good things, but it is quite possible that there are changes in the management, the responsibilities of managers, the composition of the board, among other things.
The most common problem in such cases is that the managers may take different roles and responsibilities. It is especially true when managers manage more than one fund. For example, suppose, after an acquisition, a fund manager who was managing one fund is asked to manage three/four funds, it may affect the performance of the funds adversely.
Another thing is that it is quite possible that the policies of the fund family change. For example, if a conservative fund family is taken over by an aggressive one, the fund managers of the conservative fund family are generally asked to be aggressive.
There is a chance of good funds losing their focus when their families expand and launch new offerings. Or a fund can be forced to fill a different role as its family grows.
A fund family cannot stick to one style of investing as it grows. It has to have a variety of styles if it wants to attract investors. So the values of the fund family change in such cases.
Also, mergers and acquisitions can lead to a slowdown in performance. This is so because responsibilities, management style and a lot of other things change. It takes some time for things to settle down. In the process, there is a good chance of performance getting affected.
Bonus Read: Market Crash? Should You Invest In Mutual Funds?
Spot the signs
Here are a few pointers that will help you track the changes.
Remain updated on the fund family. Regularly visit their websites looking for news of mergers/take-over and new-fund launches.
You can visit SEBI for more information on the fund family. AMCs have to register the new schemes that they launch with SEBI. You can read the offer documents of new schemes at the SEBI website.
Read analysis that appears in financial websites and in newspapers so that you remain up-to-date about changes in the fund and the fund family.
Finally, read reports on the funds every now and then to know things like the asset size of the fund, fund manager changes and strategy changes. It is not enough to just look at the returns. It is important to look at portfolio changes, risk changes and so on to ensure that you have chosen the right fund.
If you have any doubts, ask questions. If you find that a fund family is launching a new fund that sounds a lot like the fund that it has already launched, ask how the funds will differ. Or if you’re worried about the asset size of a fund, find out if the family plans to close the fund any time soon. Asking questions will help you understand things better.
The bottom line? Monitoring your funds from time to time will hold you in good stead.