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Triggers for exiting a Mutual Fund

 
The stock market has been volatile. In three years, from a level of around 17,200, it has fallen all the way down to 8,100, then recovered to flirt with almost 21,000-levels, only to remain indecisive currently at around 18,000 points.

More, the prognosis doesn't look too good. Greece's credit rating has been cut four steps below investment grade; consequently, there is areal fear of global credit markets drying up. Italy is at risk, Japan is under duress and the economic data coming out of the US is not promising. Domestically, after petrol, diesel, kerosene and LPG prices may also be raised. If this happens, factors of production will become dearer, leading to a further increase in general price levels, that is inflation. No wonder, investors are flustered.

So, the question, under the current circumstances, is, should you be selling your mutual fund (MF) investments? The world's most successful investor doesn't seem to think so. "Our favourite holding period is forever," says Warren Buffett.

Therefore, before addressing the issue of when to sell your MF, lets first dwell upon when not to sell it. In this regard, the following quote is quite pertinent. Bernstein William, in his book, 'The Intelligent Asset Allocator' says, "There are two kinds of investors – those who don't know where the market is headed and those who don't know that they don't know. Then, again, there is a third type - the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know." History has repeatedly proven, time and time again, that it is impossible to time the market. The index is flirting with around 18,300-levels right now. But no human being is capable of knowing where the market would be tomorrow or the next month or even later.

So, if you invest or disinvest based on market movements or expected market movements, it amounts to pure speculation. And, know this much – you can either speculate or accumulate, but never both.

When do you sell your MF investments?

1) UNDER-PERFORMANCE?

Investing is all about the long-term. However, it has to be the right investment in the first place. Study the performance of your funds against their peer group and also the benchmark returns. Say your fund has gained by 10 per cent. While you may be happy, this doesn't actually tell you much. To put the fund's performance in perthe correct peer group.

One should not compare an equity-diversified fund against a sectoral fund or a large-cap fund against a midcap aggressive fund. Also, take care that you gauge performance over a reasonable period of time. Most information sources publish three-month figures of fund performance. Three months is too short a time to come to any conclusion. You should always look at a minimum run of three to five years to arrive at any sort of a conclusion.

2) CHANGE IN COMPOSITION

Moving on, another reason you sell your investment is if it doesn't remain the same investment. For instance, balanced funds earlier qualified with a 50 per cent exposure to equity. Now, with the revised laws, at least 65 per cent ought to be invested to equity. Most fund managers, in an effort to spike the return, even take a higher exposure. Therefore, if the investment has become riskier than what you would be comfortable with, it's time to sell.

3) CHANGE IN MANAGER

MF companies will argue themselves hoarse that fund management is a process-driven activity and the individual doesn't matter. However, successful stock selection is a matter of experience, perspective and instinct. These are human qualities that cannot be completely reduced to a process. The fund manager's exit is a red flag; however, it could also be possible that the new guy is better than the earlier one. So, keep the fund under its erstwhile captain.

4) REALIGNING ALLOCATION

Every investor has his or her own risk tolerance. Say you are comfortable with half your funds invested in equity. Time to time, you need to check the asset allocation. With the current substantial run up in equities, chances are that your total portfolio has become distorted towards these. To bring it back, you would need to sell. Here, take care of the fiscal side. While selling, it makes more sense to sell funds over a year old for the associated tax break in capital gains.

Also, this realigning of asset allocation would automatically take care of our profit booking. But note it is maintenance of the asset allocation pattern that is the main trigger for selling and not the level of the index as such. We have established so far that amongst all the reasons for selling your funds, falling or rising markets should in no way influence your decision. If anything, if markets start falling, please buy additional units – the cheaper deal will eventually hold you in good stead.
 

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