One needs to review and rebalance a portfolio at regular intervals. This ensures that you get maximum returns from your investments. Here are 7 reasons for selling a fund.
1. You need to rebalance your portfolio
Portfolio re-balancing: making necessary adjustments after monitoring and reviewing your portfolio periodically. Even though your investment goals haven't changed you might need to sell a fund in your portfolio. Probably just to go back to your original investment mix.
It could be a challenging psychologically, as you might need to exit the well-performing fund and invest those proceeds in the not so well performing fund.
2. Your financial goals have changed
As you grow, your financial goals are bound to change. Which is why monitoring them regularly is of utmost importance so you can make the necessary adjustments. This will help you match the investments you chose to your new financial goals.
Imagine you're saving for a new house but you marry someone who already has a home. Or you realize the market scenario is more conducive for renting as opposed to owning. This changes your priorities, which should reflect in your financial goals and thereby your investments.
3. If the Fund Manager has changed ask yourself these questions
A lot of funds have star fund managers. The funds performance usually depends on them. These types of funds should be avoided but incase u find yourself invested in these make sure you keep close tabs on the management.
Invest in fund that are run by a team of professional managers and not just a single manager calling the shots. Moreover, any kind of changes in the fund management team should incite these questions:
a. The manager's qualifications and experience. Ensure it's relevant to his profession as a fund manger.
b. Does he work solo or as a part of a team
c. How has the fund company handled management level change in the past?
4. The fund didn’t meet your expectations
The important point here is to ensure that an investor's return expectations are realistic and appropriate. Ensure you are using a relevant benchmark for return comparisons.
For instance, you have invested in SBI Equity (invests in midcap-large cap). The ideal comparison would be other funds that also invest in midcap and large cap companies.
Don't just get swayed by what others are saying. Their fund type might be a lot different than yours.
Another important factor is time. Don't just focus on short-term returns. 1 year of underperformance might also not be a good enough reason to worry.
An investor in Mutual funds, debt or equity, pays a fee to the mutual fund for its investment expertise and management. This expertise should ideally result in the fund's return to exceed the comparative benchmark return, not just match it. If you feel the fund hasn't performed well compared to its relevant peers, dump it!
5. The fund’s performance has been too volatile for your liking
It is extremely important to know yourself, understand your needs and determine your financial goals. If you are young your return risk profile can be a lot more aggressive than an older investor. You can afford to invest in aggressive financial instruments that are also usually characterized with volatility.
If you are focusing on stable returns a fund's volatile performance can give you nightmares. Every time the fund's returns dip you see your retirement moving further away. Don't wait just sell.
Make sure you see the funds historic performance. Pay special attention to the fund's worse performances and see if you can absorb those times.
6. The fund’s investment style has changed
A funds style can change for a variety of reasons. The burgeoning asset size doesn't allow it to invest in existing stocks (discussed in the next point), the change in fund managing team, any kind of merger or acquisition etc. Ensure you keep a periodic check on the funds style.
For instance, you invested in a fund that primarily invests in large caps. But you see now a large chunk is being apportioned to mid caps and small caps. Question the strategy; write to the fund asking for an explanation. They are obligated to respond. If the change isn't temporary and doesn't suit your investment profile, feel free to exit.
7. The assets under management have shot up dramatically
This leads to not just a change in the funds strategy but also affects its returns. A burgeoning size of the fund might limit a manager's ability to invest in stocks and force them to hold more cash. Moreover, the fund is also likely to trade less frequently as it can affect the stock price owing to the large % of ownership.
A small cap fund might have to look at investing in large-cap stocks, resulting in a strategy change. The fund might excel in its new style but it no longer plays the same role as that of a small cap fund.
Whatever the change the fund manager might chooses to make, you as an investor should be wary of it and evaluate how it eventually affects your portfolio.