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. After the dust has settled on a decision and the investment has performed well or poorly, the "right" answer is wholly dependent on the individual.
Here are five of the most common situations that requires one to offload their investment.
1) Your investment goals change
Investments are done with the sole purpose of achieving goals. But goals are susceptible to change. As your objectives change, your investments should change as well.
Let’s assume you are investing in a balanced fund with the aim of buying a car within the next five years. That goal could be fulfilled with no effort on your part. Your company could allot a car to you. You could land a fat bonus which could be used towards the purchase of that car. Your parents might gift you a car. Or, you may get married and your spouse already owns a car. Either way, your goal has been achieved.
What must you do with the money you have accumulated? You could decide to channelise it to your retirement savings which means you can sell the fund and put your money in an equity fund.
2) Your time horizon changes
When the longevity of your goal changes, it calls for a different investment. In the example above, your goal with a time period of 5 years (car) has been replaced by a goal that is 30 years away (retirement). Naturally, it would call for moving out of a hybrid product into a pure equity offering.
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.
3) You made a mistake
You may also decide that a fund was simply not a good fit for you from the start--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 who failed to understand the investment proposition and believed they were investing in a ‘low-risk’ investment avenue should sell once they realise their mistake. Such funds tend to be volatile. 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.
4) Change in strategy
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.
5) Underperformance
This 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 three-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 of 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?
