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5 reasons to sell your mutual fund
Personalfn.com | June 24, 2008 10:40 IST
Advice on when you must invest in a mutual fund is available dime a dozen. But it takes a certain degree of expertise and proficiency to redeem your mutual fund investment at the right time. Since this is the dilemma that many investors grapple with, we have outlined the five most critical reasons for redeeming your mutual fund investment.
At the outset, it is important to note that the 'right time to redeem' does not mean that there is a timing element involved over here. Rather the right time to redeem means when the time is up on your mutual fund investment and it is no longer prudent to hold on to it.
While there may be several occasions to redeem your mutual fund investment, we have narrowed it down to the five most pervasive reasons.
When you have achieved your investment objective
A mutual fund investment is made with the intent of achieving a specific investment objective. Some of these investment objectives include, among others, planning for child's education, planning for retirement, saving for a house/car.
If you haven't achieved your investment goal, there is no reason to redeem your mutual fund (assuming, of course, that it is performing on expected lines). When you have achieved or are close to achieving your investment objective, you should stagger your mutual fund redemptions so that you are completely liquid (i.e. in cash) when it is time to realise the investment objective (i.e. pay your child's college fees or buy the house).
When your mutual fund revises its mandate
Mutual funds have an investment mandate. The mandate sets the 'guidelines' for fund managers about how they should manage their funds. Since the mandate is formally stated, investors know about this beforehand and invest in the fund if they believe that it will enable them to achieve their investment goals.
Mutual funds are known to revise their mandates if they believe that the existing mandate does not serve the mutual fund's interests anymore. For instance, in the recent past a leading private sector fund house converted its index fund into an actively managed fund.
From your perspective, you will have to evaluate whether the mutual fund with a revised mandate merits a place in your portfolio. If it doesn't, then its time to redeem it.
In the event of a revision in the mandate, regulations require that investors be given the option to redeem the mutual fund without an exit load, so you can redeem the investment without worrying about the exit load (if any).
When the star fund manager quits
A category of investors track the fund managers more than they track the fund house and its schemes. These investors invest in a mutual fund relying mainly on the star fund manager's investment prowess and skills. While the domestic mutual fund industry does not have many star fund managers, the few who can be considered stars have a committed fan base.
At Personalfn, we discourage investors from falling prey to this trend; investing in process-driven fund houses is a more reliable way of investing than betting on star fund managers.
Nonetheless, if you have invested in a fund based on the star fund manager appeal, then your investment decisions should correspond with the fund manager's migration (across fund houses).
If he quits the present fund house, then there is a case for you to redeem your investments because it is unlikely that the rest of the fund management team will be able to replicate the performance in the star fund manager's absence.
When your mutual fund is not performing
At Personalfn, we often hear of investors complaining about the below par performance of their mutual fund investments. Our advice to them is to be patient and evaluate their investments over an appropriate time frame and with the right perspective.
For instance, equity funds should ideally be evaluated over the long-term (at least 3 years). Taking a decision in haste without understanding the investment proposition of the mutual fund could prove counterproductive and expensive (if there is an exit load).
However, all points considered, if you and your financial planner are convinced that your mutual fund is a dud, then its best that you redeem it.
When you have invested in a thematic fund
Although at Personalfn we recommend that investors avoid thematic funds, the reality is that thematic funds are a feature in the portfolios of many investors. Some of these investors are well-informed and have a view on the underlying theme/sector.
However, for a vast majority of investors, thematic funds are an unknown entity simply because they do not have the necessary skills and resources to track the underlying sector/theme.
They only got invested in them either because everyone they knew was investing in them or their agent made a compelling marketing pitch for the fund. Either ways they are invested in the fund and want to know when they can redeem.
If you are one of them, then the right time to redeem your thematic fund is when the stock markets give you the opportunity. Since a rising tide lifts all boats, it is likely that the performance of the underlying theme/sector will improve in a stock market rally.
That is an opportunity for you to sell that thematic/sector fund that you always wanted to redeem but could not because of unsuitable market conditions.
Another mutual fund investment that you can redeem in a stock market rally is the dud that you invested based on a 'hot tip' and have regretted ever since. These funds are like deadwood in your portfolio, which you should never have invested in, in the first place.
But having invested in them, make the most of a stock market rally to either redeem at a profit or to minimise losses.
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