A few days back, I was emailed a question by a mutual fund investor wherein he asked me if he should redeem a particular fund. The fund in question had performed outstandingly for over six years, but of late had generated a meagre (as said by him) 60% over a period during which its peers had come up with returns of 70-90%. Should this be reason enough to exit the fund?
The answer to this question is often a quandary for most investors. I have often come across investors looking to sell a fund for a variety of reasons.
By experience, I can categorize these reasons into three basic ones?investors look to sell a fund because: they?ve made profits, they?ve incurred losses and they?re made neither profit nor incurred losses. The unfortunate fact is that this isn’t a joke.
As investors, we Indians are largely trigger-happy. For the most of us, being a good investor is directly proportional to taking frequent actions. At any given time, we have to do something with our investments, and one of the things most people do is churn their portfolios. This results in not only buying more funds than one needs but also selling them when they shouldn?t. If a fund is doing well, then a trigger-happy investor would want to sell it and book profits. If it isn’t doing well, then sell it and book losses. And if it?s just about stagnant, then shift to another one that?s doing better. Of course, none of these reasons ? by itself ? is the right one to sell a fund.
The right way to sell a fund is after carrying out some research that mirrors the research you do while buying a fund. A few questions you should ask yourself before selling a fund are: How has it performed over the 3-5 year period? Does it protect the downside during bear phases? How well has it done during most bull runs? Does its long-term return match its category?s? Has it been true to its original calling? Selling a fund because of one bad phase ? or one good phase ? is always a bad idea.
Of course, the most obvious reason for redeeming a fund is the achievement of your financial goal. But that?s hard to do because most of us invest without setting a goal in the first place. That?s another hazardous investment approach, but that?s another story.
As far as switching funds is concerned, a bit of circumspection is imperative. A fund doesn?t just suddenly become a bad one. If it?s been performing well for a long period of time then one bad quarter can be excused. One reason for a sudden bad performance could be a change in management. But even then, the new manager should be given time to prove himself. You can check out the new manager?s track records. A good manager doesn?t lose his skill overnight. And nor does a bad one develop good management skills overnight. Hence, a manager should be given time to settle down in his new fund.
Overall, if the fund has a steady management, has done well over an extended period of time, isn’t thematic and is well diversified across sectors and caps, then invariably the fund will keep doing well for the coming times as well. Obviously, staying put would be the prudent thing to do.
?Author is CEO of Value Research