Most of us are fairly certain on what to look for when buying a fund. But we often part ways on when to sell or even curb fresh investments. Here are five prominent reasons as to when investors should look at reshuffling their mutual fund portfolio.
1) Your investment goals change
A fair assumption to make is that you have invested with a goal in mind. Should the goal no longer exist, it calls for a change in strategy.
Let’s assume you are investing in a balanced fund with the aim of buying a car within the next five years. Out of the blue, your parents gift you a car or you get a promotion and the company allots a vehicle to you. Would it not be wise to instantly deploy that saving to another goal? If you choose retirement, then you could continue with your investments but in an equity diversified fund. Simply because the longevity of the goal has mandated a different investment.
Do remember, investments are done to achieve goals. And goals are susceptible to change. Even if it is the inevitable retirement goal, you may decide to retire 5 years earlier than planned. Naturally, your portfolio should reflect the change in your goals.
2) Your portfolio needs rebalancing
Let's say you started off in 2002 with a portfolio that gave equal weight to large- and mid-cap funds. By the end of 2007, your portfolio would have been anything but balanced simply because mid-cap funds outperformed large-cap funds by a significant margin at that point in time. Ditto if you started off with equal weight to debt and equity. Equity would have crushed debt at that point and your portfolio would be heavily tilted towards equity.
Prudence requires that once a year you rebalance your portfolio. Change the lopsidedness to bring your asset allocation back in line with your goals. If a particular fund has gone wild, you could start there.
Rebalancing could also take place if you are nearing your goal. Let's say you have been saving for your child's higher education by systematically investing in a mid-cap fund. As you near that goal, you could gradually start reducing your equity exposure and opt for a hybrid and eventually a fixed income investment.
3) Change in strategy
This is an external event which will force you to act.
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. In April 2008, UTI Auto Sector Fund changed its investment objective and was subsequently renamed UTI Transportation and Logistics Fund. It could also be a case of your scheme merging with another. In February 2012, Tata Mid Cap Fund and Tata Capital Builder Fund merged with Tata Growth Fund. Or, it could be the case of a fund manager change and from, say, a multi-cap preference of the original fund manager, it is now heavily tilted towards mid caps.
You have to check your comfort level with the new entity and how it fits in with your overall portfolio before you take a call.
4) You made a mistake
Closely related to changing fundamentals are misunderstood fundamentals. If you buy a shirt that doesn't fit, you return it. Sometimes investments too need to be returned, so to speak.
Investors who failed to understand the investment proposition offered by a sector fund and believed they were investing in a ‘low-risk’ investment avenue should sell once they realize their mistake.
Let's say you invested in a banking and financial services sector fund which delivered phenomenal returns in 2007 only to slump in 2008, and once again tumble in 2011 only to zoom ahead in 2012. The point of investing is meeting financial goals, not developing ulcers. If the volatility is giving you sleepless nights, then by all means sell.
The best way to avoid such situations going ahead is to be a finicky buyer. Research your investments thoroughly.
5) Underperformance
This is a serious issue because it could jeopardize your chances of meeting your financial goal. It’s a rare instance when you look at the performance of a fund and come away with a solid sell decision. In reality, it is more often than not a case where one is plagued with indecision. Should you stay on, you run the risk of seeing your money languish even longer in a sluggish fund. Exit and to your dismay, it may mount a comeback. Either way, you come out feeling like a sucker.
Lower returns on their own are not always an indication that the fund is a loser. You have to determine whether or not it is actually delivering sub-par returns. The only way to figure that one out is to see how it compares against those that have a similar investment mandate. Compare the fund with its relevant peers and the appropriate benchmark index.
Don’t be hasty. Just because the fund in question is not sitting on top of the performance chart in a year does not mean it has to be kicked out of your portfolio. Occasional ups and downs come with the territory. Instead, look at how it has fared over years. Don’t bail out at the first sign of underperformance. While one year of underperformance may be nothing to worry about, two or three years of falling behind can get frustrating.