Just as it is important to choose your mutual fund carefully before making the investment, it is equally important to take informed decision when it comes to selling it.
Selling just because the markets are falling; or because you want to book profit; or because you want to invest in a forthcoming new fund offer, etc. are all knee-jerk reactions. This will, more often than not, only bring harm to your mutual fund portfolio.
Hence you must follow certain rules in taking the final decision to sell.
1. Sell if you need money
This is but obvious. If you need money for say your child's education or to buy some gadget, you will have to sell some of your assets to finance the same.
But, make sure to choose the appropriate fund to sell. For example, you may say good bye to a fund which is not doing well; or one which has minimal tax implications. Or, it may make sense to sell a debt fund and not an equity fund. In fact, sometimes, it may be better to borrow against a certain fund, rather than sell it out.
2. Sell if the fund is not doing well
This too is quite obvious. But again, be careful.
Don't sell if the short-term performance is below par. Ideally look at a 1-3 year performance of the fund. The particular fund may have not done well due to some genuine factors. Say it has avoided the so-called momentum stocks. Thus its' performance may appear poor vis-a-vis some other aggressive funds. But once the momentum goes, the aggressive funds will lose heavily. This is where long term performance counts.
3. Sell if you have to rebalance your portfolio
Say an equity-debt asset allocation of 70:30 suits a person's financial profile and he, accordingly, distributes his investment. The sharp run-up in equity market vis-a-vis the debt market would increase his equity corpus much more than the debt corpus, thereby distorting his asset allocation. He, therefore, should sell some equity and put into debt to restore the balance.
Or conversely, the sharp downfall in the stock markets would reduce his equity exposure, but debt portfolio may have increased... again distorting the overall balance. He thus needs to sell debt and put into equity.
4. Sell if the tax policies have changed
A change in the taxation policy could affect your returns in the long term. This may make it necessary to sell and make another appropriate investment.
For example, recently the Govt. imposed a 10% tax on the long term capital gains on mutual funds. They were tax free until now. As compared to this, gains from ULIPs are tax free. So some investors have started shifting from MFs to ULIPs. Beware. Be very careful before you make such a move. You could be moving from frying pan fire because Despite 10% LTCG Tax, Mutual Funds Are Better Than ULIPs.
5. Sell if the fund's characteristics changes
You may be a conservative investor, who invested in a particular fund as it invested only in index companies. However, say later the fund decided to try and generate higher returns by investing in mid-sized companies too. This would increase the risk profile of the fund, which may not suit you. So it may be time to say goodbye to it.
Or say the fund manager has changed and you would rather stick with earlier manager. Or say the fund size has bloated, thereby making it more and more difficult for it beat the markets, as it did in the past when it was a relatively smaller fund.
In short, make a careful assessment before selling. Let not emotions take control of your decision making process. Be guided by the time-tested rules to take rational decisions.
Selling just because the markets are falling; or because you want to book profit; or because you want to invest in a forthcoming new fund offer, etc. are all knee-jerk reactions. This will, more often than not, only bring harm to your mutual fund portfolio.
Hence you must follow certain rules in taking the final decision to sell.
1. Sell if you need money
This is but obvious. If you need money for say your child's education or to buy some gadget, you will have to sell some of your assets to finance the same.
But, make sure to choose the appropriate fund to sell. For example, you may say good bye to a fund which is not doing well; or one which has minimal tax implications. Or, it may make sense to sell a debt fund and not an equity fund. In fact, sometimes, it may be better to borrow against a certain fund, rather than sell it out.
2. Sell if the fund is not doing well
This too is quite obvious. But again, be careful.
Don't sell if the short-term performance is below par. Ideally look at a 1-3 year performance of the fund. The particular fund may have not done well due to some genuine factors. Say it has avoided the so-called momentum stocks. Thus its' performance may appear poor vis-a-vis some other aggressive funds. But once the momentum goes, the aggressive funds will lose heavily. This is where long term performance counts.
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| Is it time to say good bye to your mutual fund scheme? |
3. Sell if you have to rebalance your portfolio
Say an equity-debt asset allocation of 70:30 suits a person's financial profile and he, accordingly, distributes his investment. The sharp run-up in equity market vis-a-vis the debt market would increase his equity corpus much more than the debt corpus, thereby distorting his asset allocation. He, therefore, should sell some equity and put into debt to restore the balance.
Or conversely, the sharp downfall in the stock markets would reduce his equity exposure, but debt portfolio may have increased... again distorting the overall balance. He thus needs to sell debt and put into equity.
4. Sell if the tax policies have changed
A change in the taxation policy could affect your returns in the long term. This may make it necessary to sell and make another appropriate investment.
For example, recently the Govt. imposed a 10% tax on the long term capital gains on mutual funds. They were tax free until now. As compared to this, gains from ULIPs are tax free. So some investors have started shifting from MFs to ULIPs. Beware. Be very careful before you make such a move. You could be moving from frying pan fire because Despite 10% LTCG Tax, Mutual Funds Are Better Than ULIPs.
5. Sell if the fund's characteristics changes
You may be a conservative investor, who invested in a particular fund as it invested only in index companies. However, say later the fund decided to try and generate higher returns by investing in mid-sized companies too. This would increase the risk profile of the fund, which may not suit you. So it may be time to say goodbye to it.
Or say the fund manager has changed and you would rather stick with earlier manager. Or say the fund size has bloated, thereby making it more and more difficult for it beat the markets, as it did in the past when it was a relatively smaller fund.
In short, make a careful assessment before selling. Let not emotions take control of your decision making process. Be guided by the time-tested rules to take rational decisions.
