When should you sell a mutual fund
Investors often
sell mutual funds for the worst possible reasons. They should actually sell a
fund only when they need the money to meet a financial goal, says Dhirendra
Kumar
Every saver knows that there are numerous mutual fund
schemes and choosing a suitable one to invest in can be a difficult task.
There’s actually an even more difficult choice that investors face—which funds
to sell off and when. Curiously, it is the more knowledgeable and more involved
investors who face this problem. The reason is, active and involved investors
always have an urge to do something. While such investors generally do well
because they learn, analyse and act more than others but soon enough, they
start equating being good investors with doing something, often anything.
There are many reasons for selling funds, but not all
of them are good. There can be exceptions, but the good reasons tend to be
about the investor’s own finances and the wrong reasons tend to be about the
fund. Let me explain. Overactive investors give three reasons for wanting to
sell off a fund. One, they’ve made profits; two, they’ve made losses and three,
they’ve made neither profits nor losses. Basically, investors who have a bias
for continuous action can create a logic for taking action out of any kind of
situation.
So which is the right reason for selling a fund?
Obviously, none of the above. By themselves, they are not legitimate reasons
for selling a fund. The first comes from the spurious ‘booking profits’ concept
that advisers have promoted. Booking profits doesn’t make sense for stocks, and
it makes even less sense for mutual funds. In mutual funds, the whole point is
that there is a fund manager who is deciding for you which stocks to sell and
which to buy. If the fund manager is doing this job well, then the fund will be
giving good returns. So, selling a fund that has made good returns is the exact
reverse of what investors should be doing.
Let’s come to the second reason now. While selling
underperformers is a legitimate idea, evaluate the timeframe and the degree of
underperformance. Someone will say that over the last year, my fund has
generated 25% but five other funds have generated 30%, so I will switch to those.
This switching based on short-term past performance is counter-productive. Only
if a fund underperforms consistently for two or more years, and drops down two
notches in its rating should you switch away from it. Following a relatively
long-period risk-adjusted rating system is the right way to make a decision.
So when should investors actually sell their funds?
The right answer is that they should be guided by their own financial goals.
You should sell a fund and get your money out when you need it. Let’s say you
have invested for five or 10 or 15 years, and now the money has grown to what
you need. You need to make a down payment for a house, or pay for your child’s
education, you should sell and redeem, irrespective of the state of the market.
Unless it’s an expense that can be postponed, you should start acting one or
two years before time by withdrawing the money from the equity fund and parking
it in a liquid fund. You can use an automated STP (systematic transfer plan)
for this, which will be convenient.
In a manner of speaking, the primary goal of
investing is not to invest but to sell because that’s when you achieve your
goal. Be guided by that.
The author is the Founder and
CEO of Value Research
TOI 10SEP18
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