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Despite mutual funds being around in India for 50 years now, a very small percentage of Indians invest in them. One of the reasons for this is perhaps that those who have invested in them have moved out of them after short stints, often at a loss. So, how does one know when it is time to sell a mutual fund? Here are some tips:
Underperformance If you have a mutual fund investment that is doing badly when compared to its peers and benchmark, you might consider an exit. However, you need to give your investments some time to cook. So, give equity funds about 18-24 months and debt funds about 36 months before deciding to quit. Keep track of the performance at least on a half-yearly basis. If you exit, reinvest in funds of the same class i.e. debt, equity or other funds. Don’t forget to consider tax treatment of your redemptions.
Fund manager’s exit If you have invested in a scheme based on a star fund manager’s appeal, his or her exit should make you evaluate your options. Fund manager exits often do impact the future investment performance. However, it is better if at the outset you invest in funds of fund houses that have investment processes in place and is not personality driven.
Incompatibility with your profile Changed life situations can often require you to rejig your investments. For instance, if you were to receive a large inheritance, it would make sense for you to invest more in a high risk equity scheme rather than continue in a scheme with a mix of debt and equity.
Increasing proximity to goals As you approach your goals for which you had earmarked the mutual fund investment, you would like to right align your investments for the impending use. So, if your daughter is planning to join a medical college soon, you need to move away from higher risk investments such as equity funds and move into debt funds.
Need to book profits If you think a fund has done pretty well and chances are that it is not going to be among the star performers any more, you can take your money out. On the other hand, if the fund has far exceeded your return expectations, you may consider redeeming the funds partially to get some profits. That’s because until you realise them, all the gains that you made are notional and remain only on paper.
Change in investment mandate Every MF scheme has an investing mandate, which sets the guidelines for fund managers about how they should manage their funds. If there is a change in this, you need to examine whether the fund still works for you.
In the end, a quick recap. You decide to sell a mutual fund when:
1. There is underperformance
2. An exit of the fund manager occurs
3. There is incompatability with your profile
4. A goal is nearing
5. Booking profits make sense
6. There is a change in scheme's investment mandate
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