When should you exit a mutual fund?
Timing the redemption of mutual fund units is critical for an investor to maximise returns
There are many fund managers, stock brokers, and financial advisors who provide guidance for investment in mutual funds, and other financial assets. However, very few discuss the nuances of selling or timing your exit so as to cash in the profit or limit the loss.
Mutual funds are funds operated by a fund manager in an asset management company (AMC). The fund invests in a portfolio of stocks based on its objective and strategy, which can be to provide income, growth, or both. The fund follows a theme that guides the investment. This could be based on market cap, sector, growth and value stocks, new age stocks among others.
Investors buy and sell mutual funds because these provide a better risk control mechanism as compared to investing in stocks. It also provides the option of diversification at an economical price which would have been impossible to replicate by investing in individual stocks. Let's discuss when investors should sell the mutual fund.
Change of the fund manager
The fund manager plays the most crucial role in the fund's performance. Change of the fund manager could disrupt the performance of a fund. The fund manager may change for various reasons like resignation from the AMC, opting for other funds within the same AMC etc. In such cases, returns should be observed for a few quarters and if it the performance of the fund deteriorates, investors can think of selling their holding in the fund.
However, change in the fund manager may not always impact the performance as the fund could be governed by other parameters. For example, index funds which track a benchmark index will do what the underlying index does, irrespective of the fund manager.
Change in strategy & objective of the fund
Investors select mutual funds for investment based on the objective of the fund as well as their financial goals. If a person needs income from the investment, he or she may like to purchase funds whose objective is to provide regular income by investing in dividend paying stocks and assets that provide monthly returns. If the fund manager suddenly starts investing in growth stocks and bets on price appreciation, the fund is not helping the investor to achieve his intended financial goal. This could be the time to liquidate his holdings in the mutual fund.
Similarly if the mutual fund changes the way it allocates resources to different assets, this may be a sign to re-evaluate investment. If the change doesn't serve the investor's financial goal, they should sell their holding. For example, if a fund adopts a balanced strategy where it invests 50% in debt and 50% in equity suddenly changes the mix to 40% in debt and 60% in equity, this may expose investors to higher risks.
For example. Reliance Equity Advantage fund changed its fundamental attribute and name from August, 2011 to Reliance Top 200 Fund. It also changed the benchmark index to BSE Top 200. The scheme gave an option to investors to exit if they felt the changed attributes and objectives do not serve their financial goals.
Underperformance over a period of time
Typically equity oriented aggressive funds and balanced funds are long- term investment assets and hence the investors should give some time for his investment to achieve returns. However, if the fund underperforms year after year, it may be a signal to the investor to opt out.
The investor should, however, not look at the fund's short term performance and take temporary fluctuations in returns as fundamental flaws in the fund. The performance of any mutual fund, irrespective of the businesses behind it, can be subject to temporary fluctuations. The investors should observe the fund's performance for a few years and decide accordingly. To evaluate the performance, investors could compare the fund's returns with similar funds or a benchmark index.
For example, if the investor has bought Franklin FMCG Fund (Growth) and wants to evaluate its performance, he should see the absolute performance for last three, five and ten years. He can also compare the returns with funds like ICICI Prudential FMCG Fund (Growth) which has similar attributes or with Index funds like Birla Sun Life Nifty ETF.
Conclusion
Mutual funds are the best way to invest in a portfolio of companies with sound fundamentals without having to purchase shares in individual companies. The investor should not sell his holding because of short term volatility. Study alternatives, fundamental changes in the fund, and pro and cons before deciding to sell.
Timing the redemption of mutual fund units is critical for an investor to maximise returns
There are many fund managers, stock brokers, and financial advisors who provide guidance for investment in mutual funds, and other financial assets. However, very few discuss the nuances of selling or timing your exit so as to cash in the profit or limit the loss.
Mutual funds are funds operated by a fund manager in an asset management company (AMC). The fund invests in a portfolio of stocks based on its objective and strategy, which can be to provide income, growth, or both. The fund follows a theme that guides the investment. This could be based on market cap, sector, growth and value stocks, new age stocks among others.
Investors buy and sell mutual funds because these provide a better risk control mechanism as compared to investing in stocks. It also provides the option of diversification at an economical price which would have been impossible to replicate by investing in individual stocks. Let's discuss when investors should sell the mutual fund.
Change of the fund manager
The fund manager plays the most crucial role in the fund's performance. Change of the fund manager could disrupt the performance of a fund. The fund manager may change for various reasons like resignation from the AMC, opting for other funds within the same AMC etc. In such cases, returns should be observed for a few quarters and if it the performance of the fund deteriorates, investors can think of selling their holding in the fund.
However, change in the fund manager may not always impact the performance as the fund could be governed by other parameters. For example, index funds which track a benchmark index will do what the underlying index does, irrespective of the fund manager.
Change in strategy & objective of the fund
Investors select mutual funds for investment based on the objective of the fund as well as their financial goals. If a person needs income from the investment, he or she may like to purchase funds whose objective is to provide regular income by investing in dividend paying stocks and assets that provide monthly returns. If the fund manager suddenly starts investing in growth stocks and bets on price appreciation, the fund is not helping the investor to achieve his intended financial goal. This could be the time to liquidate his holdings in the mutual fund.
Similarly if the mutual fund changes the way it allocates resources to different assets, this may be a sign to re-evaluate investment. If the change doesn't serve the investor's financial goal, they should sell their holding. For example, if a fund adopts a balanced strategy where it invests 50% in debt and 50% in equity suddenly changes the mix to 40% in debt and 60% in equity, this may expose investors to higher risks.
For example. Reliance Equity Advantage fund changed its fundamental attribute and name from August, 2011 to Reliance Top 200 Fund. It also changed the benchmark index to BSE Top 200. The scheme gave an option to investors to exit if they felt the changed attributes and objectives do not serve their financial goals.
Underperformance over a period of time
Typically equity oriented aggressive funds and balanced funds are long- term investment assets and hence the investors should give some time for his investment to achieve returns. However, if the fund underperforms year after year, it may be a signal to the investor to opt out.
The investor should, however, not look at the fund's short term performance and take temporary fluctuations in returns as fundamental flaws in the fund. The performance of any mutual fund, irrespective of the businesses behind it, can be subject to temporary fluctuations. The investors should observe the fund's performance for a few years and decide accordingly. To evaluate the performance, investors could compare the fund's returns with similar funds or a benchmark index.
For example, if the investor has bought Franklin FMCG Fund (Growth) and wants to evaluate its performance, he should see the absolute performance for last three, five and ten years. He can also compare the returns with funds like ICICI Prudential FMCG Fund (Growth) which has similar attributes or with Index funds like Birla Sun Life Nifty ETF.
Conclusion
Mutual funds are the best way to invest in a portfolio of companies with sound fundamentals without having to purchase shares in individual companies. The investor should not sell his holding because of short term volatility. Study alternatives, fundamental changes in the fund, and pro and cons before deciding to sell.
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