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Friday, July 22, 2011

When to Sell your Mutual Fund Holdings

Everyone suggests when to buy a Mutual Fund or what fund to buy. But, when to sell a fund is something that we don't usually get much advice on. As a general investor, it is possible that you are unclear about when to sell your fund holdings to make the most of your investment. The purpose of this article is to shed some light in this regard…

Why taking a Selling Decision is more difficult than the Buy Decision?

Buying a fund or suggesting a buy is pretty straightforward. There is not much complication in this part but, when you must sell the fund is something is very complicated. Why?
What if you sell a fund today and after 3 months, the fund NAV goes up by 50% and you lost out on this boom because you sold it at the wrong time…

Sounds pretty feasible isn’t it? This is exactly why taking a Sell Decision is more difficult than the Buy Decision.

Below are some general guidelines about when to sell your fund holdings…

Always keep a long term approach

One needs to understand the way a mutual fund works. Or at least the way it doesn’t: it is not a share where you buy and sell with the aim to make a profit that too in short term. We have entrusted our money with the fund manager and expect him to use his expertise and the systems of the fund house to ensure that he invests judiciously. The fund will trade in stocks, in line with the investment objectives of the fund, and we as investors will enjoy the gains from this activity.

The point here is that, MF investments are not like shares which means that the NAV of the fund will not go up drastically just like a share might. So, the whole idea is that, MF investments can be beneficial only if you buy them with a long-term approach.

Don't Sell on an Impulse

The general investor public in India is extremely impulsive. A simple example is when the Tsunami in Japan triggered a correction in our stock markets. Practically speaking, the impact of the Tsunami on the day to day activities of company’s in India is negligible if not zero. But still, our people went into the usual panic mode and started selling. During such situations, it is better to hold off on the impulsive sell.

This might sound like bad advice, but the fact is that, you have a fund manager who is supposed to make the most of the market situations and make a profit for you. So, he would be in a position to make buy or sell calls at the opportune moment and make a profit for you. Such short term corrections are usually the best buying times for value stocks which might benefit us in the long term. And, if the fund manager is prudent enough to utilize such an opportunity, we will be getting good rewards in future which we must not miss out.

Sell only when you need the money

The purpose of any investment is to utilize the proceeds in future when you need the money. Lets say you want to surprise your wife with a surprise foreign vacation on the occasion of your marriage anniversary. You get an awesome deal from a travel agent at a huge discount and you don't want to miss the offer, you can go ahead and sell the fund and use the proceeds to surprise your wife. After all, we earn and save money to keep our loved ones happy.
But, let’s say you want to sell the fund just because you have been holding on to it for more than 2 or 3 years, it would be a bad idea. First of all, you are not in any urgent need of the money and secondly why sell when the fund is performing fine? Doesn't make sense, does it?

Always look out for external factors that might trigger an exit

There are numerous external factors that might trigger an exit from a fund. For example, recently the government of India has scrapped the tax benefit on investment in the ELSS mutual funds. So, it doesn't make any sense in staying invested after your 3 year lock-in period because not many people will continue to invest in the fund and the fund NAV might tank after a year or so. So it is best if we exit after our 3 year lock-in is complete.

Always look out for internal factors for an exit

This is yet another thing we must be on the lookout. For example, a fund manager who is a star performer switches ships and joins another asset management company. The new fund manager may or may not sustain the growth the star fund manager gave us in the past. In such situations we must not be prejudiced about the new fund manager and immediately exit but, we must wait for 3-6 months to see how the new fund manager performs. If the new guy isn’t able to keep up the momentum that the old fund manager had, then it is high time to exit. The 3-6 month wait time is to avoid losing out on profits just because you are unsure of the new guys performance. What if, he is better than the star fund manager? We wouldn't want to lose out on fat profits just because we were judgmental about the new guy. Or would we?

What is the Bottom Line?

Well, by now you may get anxious and ask me, where exactly I am going with this article. The bottom line is that, buying a Mutual Fund is not a one time activity. Though you may not have to track it closely as you would with a share, you need to keep your eyes and ears open and keep yourself updated with the funds performance atleast on a quarterly basis and ensure that you don't hold on to bad performing funds.

Happy Buying Mutual Funds!!!

1 comment:

  1. Sensex bounced exactly from the level of 16990, I had mentioned that sensex could hit 16969, sensex bounced exactly from 16990.

    What next?
    August will be volatile month and will see turbulent markets, the present correction would end in September, when markets take off in a big way.

    To get accurate forecasting please visit http://www.kalpeshmaniar.com

    ReplyDelete

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