Some pointers on...When to sell a fund

What funds should I buy? That’s a question investors seem to ask more often than “What funds should I sell?” Yet, tracking your mutual fund portfolio and weeding out the funds that don’t fit is essential to ensuring that you are on track towards your long-term goals. Here are a few situations in which you should sell an equity fund:

Slippage in performance: If you’ve invested in an equity fund for the right reasons — a good five-year track record and a mandate which appeals to you, you shouldn’t take a hasty decision to sell it. You needn’t worry if your equity fund fails to match its peers in the weekly or monthly return charts. Nor should you worry if it fails to top charts every year. However, you certainly should be concerned, if a fund you own is turning out to be a chronic underperformer.

When evaluating performance, be sure to measure returns against a fund’s benchmark. If a fund fails to match its benchmark for two years in a row, that’s a good enough reason to reconsider owning it.

Similarly, if your fund has lagged across a market cycle (falling more than the indices in 2008 and rising much less this year, for instance), that too is a good reason to sell.

Change in objectives: When you add an equity fund to your portfolio, the decision is often based on whether the fund’s objectives and risk profile gel with your own. When a fund house makes a mid-course change in the fund’s objectives, you need to reconsider your investment too.

With Indian fund industry still in a state of flux, takeovers of fund houses, changes in ownership and even mergers of funds managed by the same house, are all too common. Each of these can drastically alter the fund’s risk profile and strategy and render it a bad fit for your portfolio.

Take the case of UTI Mastergrowth Fund. This fund, originally mandated to invest half of its portfolio in PSU stocks, saw its name and objectives changed to create a new avatar — UTI Top 100 Fund — a fund that would invest in the top 100 stocks by market cap. For investors who bet on Mastergrowth in order to gain PSU exposure, that’s good enough reason to exit.

Straying from mandate: A good number of Indian funds also effect subtler shifts in their strategy that can substantially change the fund’s risk profile. A mid-cap oriented fund can transform into a large-cap one and a theme fund can stray substantially from the “theme” that its name suggests.

Reliance Growth Fund, was a mid-cap stocks oriented fund in 2005 and 2006, with a 70:30 mix between mid- and large-cap stocks.

However, the fund brought a substantial change in strategy in favour of large-caps once the market fall began and has maintained only a 30-40 per cent allocation to mid-caps in recent times. Today, the fund would not be appropriate for those who seek a focused exposure to less known names.

Target returns attained: If you were targeting specific goals when you set up your mutual fund portfolio, it would be prudent to exit your holdings if your goal is reached ahead of time. If your portfolio has appreciated sufficiently to reach the targeted sum, don’t let greed take over. Sell the funds and shift to safer avenues.

Re-balancing: Gains in the NAVs of the funds you own, will sometimes allow the equity portion of your portfolio to swell far beyond the levels you initially decided on. If this happens, it is time to rebalance.

Re-balancing involves partially liquidating units in the equity funds you own and switching to debt options, so that the relative allocations in your portfolio remain within your comfort zone.