ONE of the questions that investors have with respect to their equity mutual fund holdings is for what time period they should hold their investments and when they should sell them. There is no easy answer to this and the end result would actually vary with individuals, but it's important to check a few things before deciding on the time to divest holdings.
No decisions are perfect, but when made in a proper manner, the chance of acceptance increases without much problem.
Beneficial: Investors look at decisions beneficial for them. In the actual sense, any investment that results in a gain for the investor is beneficial as far as they are concerned.
When it is for equity-oriented funds, then there is another condition that is also beneficial. There will be a lower rate of tax for the holdings that are long term in nature.
If the holdings are maintained for more than a year, then the rate of tax on the investment will be zero and, hence, this will turn out to be beneficial on the net impact basis.
This is the reason why the investor needs to consider the actual position of the holdings before they finalise a decision.
Objective: Another factor that actually determines the holding period of the investment is the investor's objective. Investors need to consider whether their objective behind investment is actually being achieved.
It could be that in a time period of three years or even one year, the objective for which the investment was made, has actually been accomplished. Then this should be the time when they can sell the investment.
This is the best way by which the decision can be taken and, hence, this has to be understood and the necessary amount of comparison made when the decision to sell has to be considered.
Change: A condition that can often trigger a decision to sell a particular investment is the condition with respect to the investment has changed. For example, an investor might want an exposure to large cap stocks, so they might have selected a specific fund that invests in this particular area. Now after some time, they might find that the fund actually holds half its portfolio in mid-cap stocks.
This goes against the requirement of the investor. This change is not something that they can actually bear for this particular investment. This becomes one of the conditions when they should think about selling the investment and switch to some other area where their objectives would be better achieved.
Slippage: There is also the situation wherein the performance of the fund could be slipping. Many investors act in haste and quickly sell off their investment when there are a few months of underperformance of the fund. This might not be the best way to go about the entire process because the fund could soon be on the path of growth and this could have been a temporary situation. That is the reason why investors actually need to watch for several quarters whether the poor performance is on account of some specific condition.
If this is the case, then the way to remedy the situation should be checked and when things do not look too good, then the decision to sell the investment would be appropriate. Otherwise, if the situation is good, then they should give time to the fund to start performing again. The other thing that also needs attention is the likelihood that there will be deterioration in the investment's performance. Then this could become a reason why the investor would want to sell the investment.
