Many investors sell their mutual funds when the markets or NAVs are down.
Many investors sell their mutual funds when the markets or NAVs are up.
Many investors sell their mutual funds when the markets or NAVs go nowhere.
All of them are WRONG.
Market movements or NAV changes are not the right reasons to say good bye to MFs. If you do so, you will never realize the true potential of such investments; you will never make mind boggling returns; you will never become rich.
Instead, there are certain very logical and scientific parameters, which should ideally prompt you to redeem your MF investments.
1. When you observe under-performance
Needless to mention, you should dump the funds that don't do well. For this, you need to judge the performance against the appropriate benchmark. For example, it would be wrong to compare the performance of a mid-cap fund with Nifty or Sensex. Their universe of stocks are completely different. And, of course, peer-group comparison is extremely vital and cannot be overlooked.
Beware! Don't be concerned by under-performance in the short term, say over 2 or 3 quarters. You may not be aware of the fund manager's strategy behind his stock selection. Only when the fund delivers poor results persistently that you should let it go.
2. When your portfolio becomes imbalanced
Typically, a good portfolio is a suitable mix of equity and debt funds, appropriate to our financial profile. As time goes by, this ratio changes because the growth rates of equity and debt markets are different. Or maybe our own profile has changed. This creates an imbalance.
For example, if the equity has outperformed debt, the portfolio becomes overweight on equity. To restore the balance you need to sell a part of your equity portfolio and move to debt. Similarly, when the portfolio becomes overweight on debt, you need to sell a part of your debt portfolio and switch to equity to get the balance right.
Another example of imbalance is when one or two funds become disproportionately large vis-a-vis other funds in the portfolio. This has to be corrected so that all funds have more or less the same weightage.
3. When the tax policies are modified
The Govt., from time to time, makes changes in the taxation structure. For example, just a few months back, it changed the taxation policy for the non-equity oriented funds. The minimum holding period for applicability of long term capital gains tax was increased from one year to three years. Or, last year the dividend distribution tax on debt funds was doubled from 12.5% to 25%.
Such changes in taxation policy may require you to modify your portfolio so that the incidence of tax can be kept to the minimum.
4. When the size of the fund becomes too large
Good performance of a fund often attracts huge fresh inflows to it. So the fund size keeps increasing. This is not a cause of worry, as long as it remains within the reasonable levels, as appropriate to its category.
For example a moderate-sized mid-cap fund is fine. But as the size keep increasing, the opportunities to find attractive mid-sized stocks keep shrinking. Again, time to quit and move to a decent-sized mid-cap fund.
5. When the nature of the fund changes
Apart from the fund size discussed earlier, this can happen in many forms. The fund manager may change. The particular fund may get merged into another one. The objective may be redefined. The load structure may be modified. Etc.
If these changes create a conflict with your financial profile, objectives, risk profile, liquidity needs, etc., you have to naturally change your fund.
6. When you require cash
Obviously, you have to sell when you need cash for some purpose e.g. buying a mobile, making a down-payment, paying your kid's school / college fees etc.
But while doing so, you must ensure that the impact of tax is minimal. Also, this is a good time to clean your portfolio by discarding the relatively under-performing funds. Or, where the exposure has become too large or too small, relative to the total corpus size.
Concluding, don't sell the wrong funds at the wrong time for the wrong reasons.
Many investors sell their mutual funds when the markets or NAVs are up.
Many investors sell their mutual funds when the markets or NAVs go nowhere.
All of them are WRONG.
Market movements or NAV changes are not the right reasons to say good bye to MFs. If you do so, you will never realize the true potential of such investments; you will never make mind boggling returns; you will never become rich.
Instead, there are certain very logical and scientific parameters, which should ideally prompt you to redeem your MF investments.
1. When you observe under-performance
Needless to mention, you should dump the funds that don't do well. For this, you need to judge the performance against the appropriate benchmark. For example, it would be wrong to compare the performance of a mid-cap fund with Nifty or Sensex. Their universe of stocks are completely different. And, of course, peer-group comparison is extremely vital and cannot be overlooked.
Beware! Don't be concerned by under-performance in the short term, say over 2 or 3 quarters. You may not be aware of the fund manager's strategy behind his stock selection. Only when the fund delivers poor results persistently that you should let it go.
2. When your portfolio becomes imbalanced
Typically, a good portfolio is a suitable mix of equity and debt funds, appropriate to our financial profile. As time goes by, this ratio changes because the growth rates of equity and debt markets are different. Or maybe our own profile has changed. This creates an imbalance.
For example, if the equity has outperformed debt, the portfolio becomes overweight on equity. To restore the balance you need to sell a part of your equity portfolio and move to debt. Similarly, when the portfolio becomes overweight on debt, you need to sell a part of your debt portfolio and switch to equity to get the balance right.
Another example of imbalance is when one or two funds become disproportionately large vis-a-vis other funds in the portfolio. This has to be corrected so that all funds have more or less the same weightage.
3. When the tax policies are modified
The Govt., from time to time, makes changes in the taxation structure. For example, just a few months back, it changed the taxation policy for the non-equity oriented funds. The minimum holding period for applicability of long term capital gains tax was increased from one year to three years. Or, last year the dividend distribution tax on debt funds was doubled from 12.5% to 25%.
Such changes in taxation policy may require you to modify your portfolio so that the incidence of tax can be kept to the minimum.
4. When the size of the fund becomes too large
Good performance of a fund often attracts huge fresh inflows to it. So the fund size keeps increasing. This is not a cause of worry, as long as it remains within the reasonable levels, as appropriate to its category.
For example a moderate-sized mid-cap fund is fine. But as the size keep increasing, the opportunities to find attractive mid-sized stocks keep shrinking. Again, time to quit and move to a decent-sized mid-cap fund.
5. When the nature of the fund changes
Apart from the fund size discussed earlier, this can happen in many forms. The fund manager may change. The particular fund may get merged into another one. The objective may be redefined. The load structure may be modified. Etc.
If these changes create a conflict with your financial profile, objectives, risk profile, liquidity needs, etc., you have to naturally change your fund.
6. When you require cash
Obviously, you have to sell when you need cash for some purpose e.g. buying a mobile, making a down-payment, paying your kid's school / college fees etc.
But while doing so, you must ensure that the impact of tax is minimal. Also, this is a good time to clean your portfolio by discarding the relatively under-performing funds. Or, where the exposure has become too large or too small, relative to the total corpus size.
Concluding, don't sell the wrong funds at the wrong time for the wrong reasons.
