While investing in Mutual Funds, you go through fund reviews, watch funds performance, track historical performance, find out what experts have to say and based on that decide if you wish to buy the fund. In short, buying a fund is no child’s play. It requires a lot of effort but you are willing to put the effort because you have expectations of performance attached to it. So when do you decide is the right time to sell a fund? Most investors sell a fund under these three circumstances:
- Exceptional performance of funds, leading the investor to decide that now it is time to book profits.
- Underperformance of funds pushes an investor to look for a better investment option and selling the current fund.
- Neither profit nor loss is such a scenario where an investor feels the fund is stagnant. Hence, they sell the fund and invest in a better investment option.
The question still stands, is performance the only measuring tool for a fund? In the three circumstances stated above, the decision to sell a fund was solely made on the performance. Experts and advisors are of the opinion that most of the funds are redeemed and/or sold because of the performance. While this could be one of factors that affect the decision for selling. It may not be very wise to make this the only factor for selling.
When You Could Not Sell
- Mutual Funds Vs Stocks
Despite investing in Mutual Funds we are always keeping a hawk eye on the markets. Just when the markets dwindle, the investors tend to rush towards redemption of their mutual funds fearing catastrophic losses. If your decision to sell mutual funds is based on the stock market performances then it could be erroneous. Most mutual fund schemes are not exactly linked to stock markets, unlike stocks. They consist of investment components such as debt, sectoral investments, stocks which are not part of the stock market indices and bonds or fixed income instruments reducing the direct impact of market fluctuations on Mutual funds. Hence, if you are hearing or reading about market fluctuations or certain volatility, it may not affect your investments as badly as you are imagining it to be. Do not hastily sell off your funds because in the long run that very fund could be a stellar performer. Take a decision based on the actual impact of the market fluctuations on the mutual funds.
- Short Term Performances
Mutual Funds are known to give results over a long period of time. When we invest in mutual funds it is natural to have some expectations regarding performances. It is also important to maintain realistic expectations. If you have invested for a period of 20-25 years and you are already starting to get jittery after a year because the performances are not sky high then you are again making an error. Judging mutual funds on the basis of short term performances could steer you away from the larger picture. Before you decide to sell the fund check the historical performance of the fund, the consistency and the reaction to market changes. If it is positive, then ideally you should stick to the fund and not consider selling it. However, if the performance continues to remain uncertain then you might want to stop the investments and watch the fund for a while.
When You Could Sell
- Change in Financial Goals
This could be a very important reason for selling funds. The investments should ideally be aligned to your financial goals. Hence, if there has been a change in the goal or some new short term goal has been created which requires funding then it may be ideal to redeem the funds. For example, if you are planning to go an impromptu family holiday then you could sell a fund to finance the trip. You could sell the latest investment because it still has not started picking up pace or has been underperforming for a while.
You also have to make sure you do not lose out on the investments by having to pay for exit loads and taxes. If a fund has a fixed lock in period like Equity Linked Savings Scheme or Fixed Maturity Plans (FMP), then you can not redeem y even by paying a penalty. Change in goals also allows an opportunity to review the entire portfolio. You could sell the underperformers, make some new investments and boost the existing ones.
- Shift to Other Forms of Investment
Not every investor wants to accumulate all wealth in mutual funds. Hence, if you are planning to invest in other forms, instead of making fresh investments you could also redeem existing mutual funds. A lot of times the portfolio gets crowded because it is not diversified enough. For example you have invested in four balanced funds. So if you are planning to invest in real estate, you could redeem a few similar funds and make the real estate investment.
Other instance could be, you are close to retirement. You are looking for more stable forms of investments which provide steady growth and regular returns. By using the Systematic Withdrawal Plan you can start redeeming your funds while the balance amount not redeemed continues to generate returns. Based on your age and risk taking ability, you could also consider selling the funds and move to options such as fixed deposits or tax free bonds which provides fixed rate of return.
- Subjectively Measuring Performance
It is often said to not sell solely based on performance. As an investors you could measure performance by analyzing how long you want to stay invested and what is the performance you expect in upcoming years. Hence, if you are planning to stay invested only for ten years and even after two or three years the performance is not up to your expectation. Then you might consider the option of selling. However, in the same fund, if you are planning to stay invested for twenty or twenty five years, then the performance in the first two or three years should not push you to sell the fund. Hence, time acts an important factor in making the decision of selling.
Funds that have a history of good performances will suddenly not start performing badly. So unless you are about to make major losses it is best to buy and hold for a while and see if the tides turn in your favour.
‘When to Sell a Fund’ is a subjective question, best known to investors who are dealing with it. Our needs and financial goals keep changing, it is natural to sell funds and keep some to ensure that the ultimate aim, that is, the fulfillment of financial goals is met. It is always best to exercise caution and not rush while making a decision to buy and sell. The decision to sell always has to be in favour of profit making. If you redeem a fund due to short term market volatility or have to pay a heavy exit load on the entire amount being redeemed and not just the initial investments then you have to make a call regarding how favourable it is. It is always best to seek professional help of your financial advisors and let their expert opinion guide you in your investment journey.