Four Good Reasons To Sell A Mutual Fund
Mutual Funds reap are not speculative tools, and work best when held onto for the long run - there are in fact times when it makes sense to sell your holdings in part or in full. Here are the top four
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Most Mutual Fund Investors seem to have a common grouse with their Advisors - they're great at telling you what to buy, but most are lousy at telling you when to sell and cash out! While it rings true that Mutual Funds reap are not speculative tools, and work best when held onto for the long run - there are in fact times when it makes sense to sell your holdings in part or in full. Here are the top four.
Whether you're invested into debt or equity funds, its important to understand they key underlying trends that drive returns. For instance, duration based debt funds perform well until bond yields start stabilizing - or rising. Similarly, credit opportunities funds and equity oriented funds do well while corporate earnings are improving and balance sheets are strengthening, resulting in profits as well as upgrades. When their underlying trends begin to take an about turn, make sure you start cashing out of your Mutual Fund systematically. Similarly, a fund that has been an underperformer within its category for 4-6 straight quarters may be considered for sale.
Change in Fundamental Attributes
Your Mutual Fund scheme may undergo material changes in the fund management team, their fundamental attributes, or even in their AMC (in case of a takeover). All three are good reasons to reconsider whether or not you'd like to stay put in the scheme or cash out. For instance, several MF schemes changed their attributes and permitted up to 10% of their portfolios to be invested inti InvIT's (Infrastructure Investment Trusts) a few months ago. Investors who were not comfortable with this change were given the option to exit the scheme without bearing an exit load. Similarly, a star fund manager who has been the flag bearer of a particular scheme may exit the company, bringing its future performance into question.
Consolidation or Rebalancing
Over the years, you may have piled on a smorgasbord of mutual fund schemes, with many of them really overlapping with each other. Not only is this operationally cumbersome; it actually goes on to affect returns as well. Owning too many funds in the same category essentially means you've cast the net too wide, robbing your portfolio of a good chance to outperform the broader markets by too much. In such a scenario, you'd want to consolidate your portfolio by selling the relative laggards in each category. Similarly, your annual portfolio rebalancing may warrant the disposal of certain schemes, either in part or in full, to bring your portfolio back to the asset allocation that's in sync with your risk appetite and overall objectives.
Lastly, your Financial Plan may warrant the sale of certain Mutual Funds. For instance, you may have saved in Equity Oriented Mutual Funds for several years for your retirement. As the date approaches, you'd want to begin a structured de-risking process that would last for 24-36 months leading up to your actual retirement date. Don't be tempted to hold on to volatile funds until the penultimate moment when it comes to your goal-based savings, simply because they've done well. Markets can turn on a dime, leaving you between a rock and a hard place.
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