Buying a mutual fund is relatively easy, and there are multiple tools available with an investor today to make investment decisions.
But, one of the most common problems faced by retail investors mainly is –
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When should these investments be sold?
Selling always remains a crucial decision and thus it is wise to get the hang of it. Remember, one shouldn’t just sell the fund when it is not performing well, or when the market is in a bear phase.
As an investor, you should remain invested for a long-term until and unless something is amiss with the fund or you need liquidity and have no other options.
In this blog, we shall touch upon when you should sell an investment and other critical things to look out for while making any selling decision –
1.If your investment goal is achieved
If you were saving for any specific purpose (for example, wedding, buying a property, or car or any other financial goal) and if the goal is met, then you can exit your investment.
Also, if you have invested in equity funds completely and have nearly reached your goal, you should start redeeming your investments from equity fund to a comparatively safer fund such as liquid fund.
This exercise should ideally begin when you have 15-18 months left for your goal.
This approach enables you to shield your corpus from any adverse market movement that may happen over the 1-1.5 years period.
2.If your fund is consistently underperforming
If your scheme is underperforming for a long time, you should consider selling your investments.
However, before exiting any of your investments, remember to check the returns concerning the benchmark and peers, particularly the best performing funds of the category.
This approach helps you get a clear picture of what is wrong with your fund.
For example, let us take the case of 2008 or 2013, the market continued to move south for nearly a year. But when compared with the benchmark which was also down your fund may not be as bad.
Similarly, when compared with the toppers of the category, your fund may not deviate by strong percentage points.
This, in a way, justifies the reason for your fund’s underperformance and you may not want to sell it immediately instead you may want to give it some more time.
Thus, always look for comparative analysis to get a holistic view rather than just a standalone approach.
3.A fundamental change in the fund
Each fund has an objective, and a fund manager typically abides by the same.
This results in some fundamental attributes surrounding each fund.
If you see any structural change in the scheme, for example, merger with another scheme or any change at the AMC level such as merger/de-merger of AMCs, discontinuation of Joint Ventures (if any), you may want to re-look at your investment thesis.
If the changes proposed by the AMC are not in-line with your investment objective, you should exit the investment.
4.Change in the investment style
Each fund follows a particular style of investing. For example, investment style can be value or growth or blend. For our novice readers, investment style is the set of criteria that is followed to select the assets in a fund.
The style may change due to multiple reasons such as a change in fund manager who has a different strategy, or the fund house decides to change the style for better performance, or the fund manager believes that tweaking style could result in improved performance.
We think if there is any change in the fund management style, you should consider eliminating your investments or rebalancing your portfolio to make get it inline with your risk profile.
5. When your portfolio is getting skewed towards one asset class
Many times we see that during a bull run with significant returns getting accumulated, the equity portion becomes sizeable in a portfolio accounting for a substantial part.
This results in the debt portion losing its shine. Thus you need to rebalance your portfolio and may have to sell your positions in equity funds.
Lastly, to meet a financial emergency, you may need to liquidate your portfolio, but in such cases, you may not have much choice.
However, you may consider getting a soft loan from friends/family/relatives or any unorganized market lender before deciding to sell your investments.
Now that you know the points to scenarios to consider before selling a fund, these are the certain things you should keep in mind before investing in a fund.
Don’t just run for returns from investment for investing in mutual funds. There are a lot of factors you should look into before selecting a fund which will match your investment goals.
Following the 3 things you should always remember before investing in Mutual Funds :
1.Don’t blindly invest in the fund with the highest returns. Invest based on the duration you want to invest for.
2.Every person’s financial condition is different. Evaluate the funds you invest in yourself – don’t invest in a fund because of its popularity.
3.Review your investment from time to time but not too often. Once a few weeks is good enough.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.