After the dust has settled on a decision and the investment has performed well or poorly, the "right" answer is almost wholly dependent on the individual. It's difficult to arrive at selling criteria that fit every investor.
A common reason to sell a fund is when your objectives undergo a change. This calls for your investments following suit. Suppose you start investing in a balanced fund with the goal of buying a house within the next five years. If you get married and your spouse already owns a house, you may decide to use that money for retirement instead. In that case, you might stop your investments into the balanced fund and opt for a mid-cap fund. You may even decide to sell your units in the balanced fund and channelise the money into an all equity product.
When your goal and the time until you draw on your investment have changed, the investment should, too. For the same reason, debt funds should become increasingly prominent in your portfolio as you near your goal (of retirement).
You may also decide that a fund was simply not a good fit for you from the start--perhaps it's 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.
When you evaluate a fund’s place in your portfolio due to your risk-taking capacity and your asset allocation plan, it is very subjective in nature.
When it comes to performance, one has to be much more objective.
Although one year of underperformance may be nothing to worry about, it can get frustrating to watch your fund fall behind the competition for a couple of years consecutively. Before cutting a fund loose, though, be sure that you’re comparing your underperformer to an appropriate benchmark and the right fund category. It would be foolish to compare a mid-cap fund to the Sensex or compare it with a large-cap fund.
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. So look at annual returns and trailing returns. 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.
It's a mistake to pull the plug on a fund based on short-term performance. (Read: Does past performance matter?) 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. Is there upheaval at the fund-company level--for example, is your fund company merging with another firm? Or have investors flooded your once-nimble fund with assets? Has an influx of new assets cramped the fund manager’s style? Is anything notable going on with the asset management company, or AMC?
In all your analysis, keep one factor in mind. It is not often the case whether the fund is a blatant good or bad, all that matters is whether or not it’s a good fit in your portfolio.
Finally, when deciding to sell a fund, take tax into account. If you sell the units of your equity fund after a year of holding, you pay nothing as long-term capital gains tax.
