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When to sell your mutual fund
Kayezad E Adjania, Outlook Money | June 20, 2007
You may invest in the best mutual funds consistently, but unless you encash your gains at some point, they remain merely on paper and you don't reap any benefits. Sometimes, it may even be a loss that warrants your exit.
So, when is the right time to exit your mutual fund?
1. Underperformance: You invest in a MF either because you do not have the time or the expertise to manage your money. But it's disheartening to see your MF underperform. It's okay if your fund's underperformance is an aberration, but when this becomes regular, it's time to say goodbye.
For instance, Birla Advantage Fund (BAF) -- one of oldest and a once-popular diversified equity fund, has underperformed the category average in six of the past seven years (2000-2006).
In the latest Outlook Money Annual Mutual Fund Rankings, BAF was ranked No. 42 and earned three stars, out of a total of 74 diversified equity funds. So, wait and watch for two or three years, if you have a equity diversified fund.
2. Target achieved: Typically, we invest today to meet our needs of tomorrow. Vipul Bondal, 35, public relations executive in Mumbai, wanted to take a trip to Goa with his wife. He also wished to gift his wife an air-conditioner. So, in June 2005, he increased his monthly contribution to Systematic Investment Plans (SIP) in diversified equity funds from Rs 8, 000 per month to Rs 9, 000 per month.
The rise in equity markets, meanwhile, boded well with his habit of saving regularly. They cashed out in 2006 and the couple finally made their dream vacation to Goa the same year.
"Instead of taking a loan to go on a vacation and then pay equated monthly instalments (EMI) to the bank, why not pay the 'EMI' to yourself by starting a SIP," says Bondal.
And, last year, they also bought their AC, which must have been put to good use this sweltering summer.
3. Frequent change of fund's objective: A fund may lose focus, or may find its chosen path difficult to walk over a period of time and, hence, decide to change its course.
Few sector funds that once invested in the IT sector changed focus and turned themselves into diversified equity funds when the sector fared badly in 2000 and 2001.
But, when your fund does this too often, it's bad news for your investments. Tata Select Equity Fund has changed its investment objective three times in the past 11 years. Initially a core sector fund, it became an IT fund in December 1999, only to switch again to a select sector fund.
This last move did not pay off either, and in August 2002, the fund became a plain-vanilla diversified fund. Such frequent changes can create problems.
4. When your fund is taken over: The Indian MF industry has seen 13 instances of one fund house acquiring another; the latest case being that of UBS Global Asset Management Company, a Swiss MF house, acquiring Standard Chartered MF.
It bodes well for you if the acquiring fund house has a good track record. But of what use is it going to be to you if the acquiring fund lacks a good track record or does not have a good pedigree.
GIC MF's acquisition by Canbank MF in 2004 did not benefit unit holders of either of the fund houses as both suffered from a poor track record. GIC MF's investors would have been better off switching to another MF.