A mutual fund investor is spoilt for choice with multiple schemes available with varying objectives and returns across categories. Returns from an investment depend upon deciding when to enter and perhaps more importantly, when to exit. Following are certain triggers which warrant a reassessment of your investment and if the need be, an exit from it.
Assessment of performance is to be done at intervals of 6-9 months with regard to long-term returns (1, 3 and 5-year) and comparison with its category and benchmark index. If the performance continues to be consistently below par over long periods of time, then it may be worthwhile considering switching over to a better performing fund. Short-term fluctuations do not necessitate an exit. However, an investor should investigate significant short term fluctuations for it may provide a peek into certain long term trends.
Reaching goal/need for funds
Mutual fund investments are generally goal-based—for education, buying a car/house, vacation, etc. So naturally when the set goal is reached, the investor should liquidate his holding in earmarked funds for this specific goal. Unforeseen requirement for funds may be met by withdrawing from schemes that have not been started with any specific purpose or goal and which do not carry an exit load.
Sharp rise in its NAV
If any fund has seen a very sharp rise in its NAV over the last few quarters due to macro or micro reasons, one needs to check whether it is time to book at least a part of profits in that investment. This is important, as in most cases, such funds revert to the mean in terms of returns after a good run. This also helps in reweighting the portfolio back to the original weights.
Rebalancing the portfolio
We all have a certain asset allocation across various investment options such as debt, equity, real estate, gold, etc. A rebalancing might be required due to a change in your financial position or change in portfolio composition due to different assets growing at different rates. Or maybe a new asset class has been introduced in the market—a real-estate fund or a gold fund—and you want to take advantage of it. Thus you may have to sell a part of your existing investment and re-invest in this new asset class.
Change in taxation policy
An adverse change in the tax policy could become a reason to sell. Triggers that warrant a review but may not necessitate selling.
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Change in fund style or objective: Any change in the investment style by the fund manager that either impacts us or is against our risk profile would mean that we need to review the investments in such funds.
Change in key persons managing fund: When investing, one of the criteria is to evaluate the expertise, knowledge, experience and past performance of the fund manager, research team or investment committee. Any changes in these may warrant a relook at the investment.
Change in the fund’s corpus: Sometime the size of the fund starts affecting the returns. If a fund becomes too large to manage or too small to capture new investment opportunities, an investor should review the absolute and relative performance of the scheme for a certain period of time (say 6-9 months) and then decide whether to exit.
The writer is head, retail research, HDFC Securities.