This article was written by Peter Arnold, the Asia-Pacific copy editor for Morningstar.
As we age, our investment choices need to change to suit new circumstances and new objectives.
That can mean altering the mix of investments and selling funds. Morningstar research is not only useful in helping you decide which funds to buy, it can also guide you when comes to selling funds.
So what should you keep in mind when deciding to sell a fund?
It's difficult to arrive at selling criteria that fits every investor and it's very much a personal decision based on individual needs, though a common reason is to meet new objectives.
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 may want to sell the balanced fund and channel the money into an all-equity product.
Equally, your investment outlook will change as the time to when you will draw on your investment narrows. This means the relative safety of fixed interest can become more prominent in your portfolio as you near your goal of retirement.
Of course there are other reasons to sell a fund. Perhaps your original decision to buy a fund was too impulsive and you decide it is no longer a good fit because of its high levels of risk.
Alternatively, perhaps you feel a fund is too conservative and given your age and income level, you decide you can tolerate higher risk and volatility for the prospect of higher returns.
Whatever motivates you to sell, the process of evaluating a fund's place in your portfolio should be based on your risk tolerance and goals and as such is very subjective.
Performance, however, is a much more objective measure.
Yes, it can be annoying and frustrating to watch your fund fall behind the competition over a year or even a few consecutive years, but before you consider ditching it and moving on, be sure you understand why it's been underperforming. Uncovering any structural or management problems can make your decision much easier.
To that end, make sure you're comparing the underperformer to an appropriate benchmark and right fund category. For example, it's pointless and confusing to compare a small-cap fund with the Sensex or with a large-cap fund.
Next, check whether the fund's downward shuffle is a recent development or part of a sustained pattern of performance weakness. While it is important to remember that past performance is no guarantee of future returns, it can be a significant indicator of inherent problems with a fund.
For example, an above-average three-year ranking actually may be the result of just one stellar year combined with two poor ones, or vice versa. So consider annual returns and trailing returns in your analysis.
You should take into account the overall economic conditions so you can properly assess whether the fund is subject to forces beyond its control, whether it's merely undergoing a rough patch for its style or whether it has more serious problems.
It can be a mistake to axe a fund based on short-term performance. It's common to hear investors complain that the fund they sold because of underperformance suddenly turned in a rock star performance.
Morningstar analysis has a particular focus on a fund's management for good reason. Substantial changes in the team behind the fund can indicate underlying problems, so check to see if the fund's management remains in place and that it is still employing the strategy that attracted you in the first place.
There are other indicators as well. Is there upheaval at the fund company -- for example, has it been taken over or is it merging with another firm? Has the once-nimble fund been flooded with assets? Has an influx of new assets cramped the fund manager's style?
It's important to check Morningstar's research as our analysts can flag potential problems with a fund by downgrading its rating.
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 it's a good fit in your portfolio.
Finally, if you decide to sell a fund, take tax into account. Any capital gains or capital losses ultimately may make your decision easier.
