Whenit comes to spending large sums of money, we tend to invest a lot of time andeffort in choosing the right product. Which is why we find it difficult to letgo of our prized possessions, whether it's a car that no longer runs, a housethat's falling apart or a fund that's been losing consistently.
Ingeneral, the 'buy and hold' strategy works, but as Vikaas M. Sachdeva, countryhead, business development, Bharti Axa Investment Managers, says, it needs tobe challenged occasionally. Exiting from a mutual fund requires analysis and constant monitoring, without emotional interference.
"Fundinvestments are based on financial goals; you follow a certain investment philosophy and allocate your assets in a way that they fulfil your objectives,says Gaurav Mashruwala, a financial planner. For instance, if you are single,in your early 20s and your first goal is to buy a car, you might invest ahigher percentage in equities. "Once you have reached your goal, even ifit is earlier than you thought, it makes sense to sell your fund and actualiseit, says Dhirendra Kumar, CEO, Value Research.
Itmay be worthwhile to evaluate your investment strategy periodically to ensurethat it meets your objectives at every stage of life. It could be buying ahouse, marriage, birth of a child, education or retirement. "If aninvestor's objective has been met, it may be time to modify his portfolio, say,move to debt as he gets closer to retirement, says Mashruwala.
"Inorder to know when to exit, you need to review your portfolio regularly, atleast once every quarter, says Sachdeva. Portfolio allocations can becomeskewed without you realising it. An allocation of 60:40 in equity and debt canchange to 70:30 if your equity component gives a 50% return, exposing you to ahigher level of risk. This would warrant some profit-booking from equity andadding this component to your debt portfolio.
However,Mashruwala cautions that a portfolio does not have to be rebalanced if it is upor down by only 10-15%. Rebalancing should take place only if the allocationhas changed or is skewed beyond this limit, he adds. Kumar says thatrebalancing should not be done only to time the market. Nor should you exit andreinvest in another equity theme to capture the next upside. Your investmentfollows a particular allocation strategy and may lose its meaning if churnedconstantly. "It may be wiser to invest in funds that give regulardividends, considering it is a taxfree element and an automatic profit-bookingstrategy, says Sachdeva. However, exit if your cash flow is not enough.
Anotherreason to sell is if your fund has consistently underperformed its benchmark.According to Sachdeva, investors should study the performance of a fund forfour consecutive quarters before arriving at a decision. If there is nosubstantial improvement in its performance relative to its benchmark or peers,you may want to get out, he says. Benchmarking is an important factor ingauging a fund's performance and determining whether it has kept up to itsoverall investment objective.
KrishnanSitaraman, director, Crisil Fund Services, says that if selected properly,benchmarks can provide investors a perspective on the expected risk-adjustedperformance of fund portfolios and help them take investment decisions. So, ifyour portfolio warrants investing in an index fund as a passive strategy,compare its performance with that of the index and not of its diversifiedequity counterparts. "Even if the index has underperformed, you shouldremain invested since it serves a particular purpose in your portfolio, saysMashruwala.
Thereare, however, certain funds that have either underperformed their benchmarkindex consistently or have shown too much volatility. The JM HI FI fund, forinstance, has underperformed its benchmark index for periods ranging from thepast one month to the past one year. Others like JM Small and Midcap Fund andFortis Fortune Leaders Fund, have done well in a roaring market, but the sharpups and downs in their performance make them more susceptible to a longerrecovery time when markets weaken.
Dueto the pressure to perform, fund managers may invest in stocks to capitalise onspecific movements, deviating from their original allocation. In suchcircumstances, investors should consider R-square, a statistical measurerepresenting the percentage of a fund's movement that can be explained bymovements of the benchmark index. Investors must be sceptical about anythingless than 0.80 (80%), says Mashruwala.
Youmay also consider exiting a fund if the management changes. The entry or exitof fund managers could have a bearing on your fund's performance. "As longas the scheme objective does not change, you should wait for two quarters tosee what the incumbent fund manager does, says Sachdeva. Mashruwala supportsthis theory, and adds that there is every chance the new fund manager isbetter. In such a situation, remain invested.
Someinvestors prefer to exit if the fund size changes dramatically. Sachdevabelieves that a very large fund is unwieldy. In many cases, fund managersproactively discontinue an investment in their funds if they feel they areunmanageable. Also, expense ratios, which range from 1.75% to 2.5%, can eatinto your corpus. The good news is that there is a ceiling on fund expenses in India. So,funds cannot charge more, protecting investors from sudden spurts.
Youmake investments with an objective in mind. So, within equity, you might decidethat a part of your portfolio should be invested in FMCG and pharma. But ifyour fund manager wnats to change the mandate of the fund and invest inunrelated sectors, it may be wise to re-evaluate your investment.
Sometimesfunds change their names, investment philosophy or merge, either to attractmore customers or get rid of a mandate that didn't appeal to investors. Thiscan disturb your strategy, but it does not warrant an impulsive sell, saysKumar. The recent merger of Kotak MNC Fund, Kotak Technology Fund and KotakGlobal Fund into the Kotak Opportunities Fund works, as the objective of thefund has become broader.
Similarly,UTI Basic Industries was renamed UTI Infrastructure, but the investmentobjective remained untouched. The UTI Auto Sector Fund was renamedTransportation and Logistics Fund to broaden its scope and has deliverednotable returns. "Investors can keep abreast of such changes by monitoringtheir portfolios and taking suggestions from financial advisers, says Sachdeva.
Ideally,put your fund on a watch list before taking any decision. If the fund house isover a decade old, give it a longer time. Most important, Mashruwala says, ifan investment does not suit your objective, exit without a second thought.
Source: Money Today