Anil Rego, CEO, Right Horizon Financial Services
In equity markets, there is a popular adage that, “Almost anybody can enter a good stock at the right time, but only the smart investors can exit at the right time.” As much as a mutual fund is a long term investment, there are some unique situations when there is a strong case for you to sell and exit your mutual fund holdings. Here are 7 such instances for you to exit your mutual fund holdings.
The fund is consistently under performing
When we talk of underperformance we are referring to consistent underperformance. Even the best of funds tend to have a few bad quarters. That is why it is always better to focus on 3-5 year returns on mutual funds. But then there are some genuine cases of underperformance. For example, your funds may be exposed to the wrong sectors at the wrong time. Alternatively, your debt fund may have taken too much risk on low quality debt without the concomitant benefit of outperforming the benchmark. If your equity mutual fund is yielding lower than an index fund, then you are actually earning negative yields on your market risk. That does not make sense. There are occasions when the fund returns have been too volatile which again defeats the purpose of MF investing. These are cases you must look to exit and reinvest in alternate funds.
You are uncomfortable with recent fund manager decisions
This is a common problem that many investors face. Here are a few such instances. Your fund manager has decided to change the objectives of the fund. A large cap fund may have been converted into a mid-cap fund or sectoral definitions may have been expanded. You may observe that the view taken by your fund manager is consistently wrong leading to underperformance. There are also cases when recent decisions by the fund manager on maintaining liquidity levels, investing at higher levels and portfolio churning are making you uncomfortable. When you have genuine reasons to believe that these decisions are not in your larger interest, it makes to exit the fund.
Key macro changes have happened that could impact values systematically
This is not exactly in your control. Quite often you observe that some of the recent decisions by your fund manager do not seem to be in sync with the shifting macros. The RBI may be inclined towards raising interest rates but your fund manager may still be adding on to long maturity stocks. The capital cycle may be slowing but your fund may still be heavily invested in capital goods sector. More recently, certain announcements made by Trump have created short term risks for the IT and the Pharma sector. If your fund is overexposed to these sectors, it is time to move on.
The desired goal has been achieved or it is not meeting up to the goal
This is slightly more unique to you and your individual goals. The whole idea of financial planning is about straitjacketing investments to meet your goals. If you have made an investment to meet the margin money payment for your home purchase, then it makes sense to liquidate your mutual fund and use it up for the purpose it was intended for. Then there are cases when your mutual fund investment is actually compromising your goals. You may have invested in an equity fund with the realistic assumption of 12% annualized returns. At the end of 5 years, your actual returns may have been 2% lower. It is a fit case for you to exit that particular mutual fund holding and look for alternative investments to achieve your goal.
It is time for you to rebalance your portfolio
Ok, there are genuine reasons to rebalance your portfolio. There could be a variety of triggers for the same. You may have crossed the age of 50 and there may be a genuine need for you to reduce your overall exposure to equities. The macro situation may have changed to favour large cap stocks over mid-cap stocks from a secular perspective. Some of the fund NAVs may have gone up very sharply after a frenetic bull run and therefore your exposure to risk assets may have gone up sharply in value terms. All these could be triggers for you to rebalance your portfolio. When you rebalance your portfolio, there are some funds you will have to sell and some fresh funds you will need to buy so that your portfolio is in sync with your long term goals.
Core features of the fund may have changed
These could happen due to a variety of reasons. For example, your existing fund may be selling out to a new AMC and you may not be comfortable with the new group. Alternatively, your fund may decide to convert its core focus from being a diversified fund to an infrastructure sector fund. This concentration risk may be making you uncomfortable. In case of balanced funds, the fund may take a call to move from a majority equity driven fund to become a majority debt-driven fund. These are all cases where the core objective and features of the fund may be changing. If you are not comfortable with this shift, you must seriously consider exiting the fund.
Your fund is getting a lot of negative media coverage
Let us begin with a small caveat! Media coverage can at times be quite subjective; hence you need to take it with a pinch of sale. However, you also need to remember that there is normally no smoke without fire. If your fund is facing a run of redemptions, if there are consistent negative stories about the performance of the fund, if there are repeated cases of SEBI investigations and observations with respect to fund manager actions; these are all cases that can raise red flags over the sustainability of the fund performance. While these are hard to verify, as a prudent investor it is always better to think with your feet.
Remember, exiting a fund is as important a decision as entering a fund. Not all exits are a statement on the fund’s performance as in the case of macro changes or your goals being met. The moral of the story is that in times of serious doubts, it is always better to think with your feet!
(The above article's Tamil version appeared in Nanayam Vikatan magazine dt 25/6//2017)