Is it time to sell your investments?

Now that the Sensex has scaled 15000, an absolutely new psychological barrier, the question running in everyone’s mind is whether to stay put or rush for the door. In one of my previous articles, we analyzed several reasons for selling stocks. This article attempts to address reasons for selling your mutual fund schemes.

Before you consider exiting your mutual fund investment/s, one of the important questions to ask yourself is the reason for buying this particular scheme. I am sure there might be several reasons but for most people it is “High (Highest) Returns”. This reason can easily fizzle out as it is very difficult if not impossible for schemes to consistently give High(est) returns. Some of the funds have performed consistently well in both up and down markets and have demonstrated their ability to be in the top quartile of funds, but there may be instances where these funds lag the market for various reasons.

Does that mean you should rock the boat at the smallest sign of trouble? The answer is ‘No’. Investing in Mutual Funds like investing in stocks is akin to getting into a relationship. The idea is to share the good and the bad times. Well you will have no problems sharing the great times (read investment rocking or bull markets) but going through a rough patch (read returns lower as compared to peers or bear markets) is testing time for most of us. However there will be times, which will necessitate you to take those tough calls.

Here are 6 such times when you should consider selling your mutual funds.

1. Poor Performance

The first and foremost reason for quitting any investment is that the fund has demonstrated poor performance. Infact this should be the last reason to consider quitting a scheme. First analyze the reasons for poor performance and the period over which the fund has demonstrated poor performance. Is it that the fund manager has taken some stock specific or sectoral calls that have gone wrong? Are some of the stocks out of favor currently? After all the reason that you have opted for a scheme is the track record of the fund manager in managing the scheme in good and bad times. So as long as there is no change in the fund manager you need to take stock whether underperformance for a few months warrants exit from the investment.

There are times when a star manager /fund management team will falter. You should not penalize the fund manager for sticking to the investment mandate of the fund. After all, this is what you would expect from him. However if he does not stick to the investment mandate of the fund but takes calls that he should not be taking, then one can look at moving out. For example someone who is mandated to be invested in equities at all times moves out when he takes the view that the markets are overvalued at 12,600. Since then the markets have delivered 20% and investors have lost on this opportunity. Well you can argue both ways that being in cash is a better strategy or not, a scheme that is mandated to be invested at all points should just do that.

For example Sundaram Select Mid Cap Fund has had consistently more than 22% in cash and this seems to have dented returns. One could attribute the high cash levels to a lack of conviction in the market or the belief that one can time the market. Both these reasons are detrimental to the future performance of a fund.

Keep an eye on the scheme whether it under performing continuously for a couple of quarters. If the fund doesn’t recover after several quarters of underperformance you can look at exiting the fund.

2. Follow the Manager

Fund houses often promote schemes that have done exceptionally well and the fund manager is accorded godly status. The scheme is then aggressively marketed and subsequently new schemes are launched using the star manager’s name. Then suddenly when the fund manager departs, the fund house is quick to do a volte-face and retort that we are a process oriented fund house. The fund house cannot have it both ways. So one needs to be careful of the statements a fund house makes. Take the example of SBI Mutual Fund and Sandeep Sabharwal. There was a lot of noise created around his midas touch during the launch of SBI Bluechip Fund. But as soon as the NFO was over, there was not even a murmur about his departure and exit. Such steps can prove to be harmful for investors. Luckily for SBI, the incoming Head of Equity proved to be as competent as his predecessor and was able to maintain the sheen of most of the SBI funds. Needless to say SBI Bluechip bombed. Similarly Lotus Mutual Fund was purely marketing their schemes on the basis of Sabharwal’s brand and track record. However when he quit the fund house just before the launch of their maiden equity offerings, Lotus seemed to have lost its trump card. There is no strong evidence that a fund’s performance will suffer for sure after a star fund manager’s departure but yes it’s a very important factor.

When a fund manager departs, check whether a competent fund manager with a consistent track record has stepped in. Also check if the fund manager sticks to the investment strategy of the fund or deviates from it. Reading and a finer analysis of the fact sheet will give you a sense whether there has been a churn in the portfolio in terms of stocks , sectors , asset allocation or strategy.

If a team of fund managers manages the scheme, one exit will not disrupt the fund and hence you should stay put and evaluate the investment for two quarters. However if there is an experienced fund manager who comes in the picture, you can look at opting for better options.

3. Size of the Fund

Size of the fund could have impact on a scheme’s returns. Funds such as Reliance Growth, HDFC Equity continue to shine even with a corpus of 3900 and 4400 crore respectively just as they did when they were much smaller in size. However funds such as SBI Magnum Global and Sundaram BNP Paribas Select Midcap seem to have tapered down under the pressure of too much money. This is particularly true for small and mid cap funds as it is difficult to move in and out of such stocks quickly. Reliance Growth had shut shop at 1700 crore but is open for subscription at almost 2.5 times of its previous closure. When closing the fund becomes a fashion nobody wants fresh subscriptions and hence launching a new scheme becomes a no brainer. After all, who wants to have Daal every day?

A look at Sundaram BNP Paribas Portfolio shows around 115 stocks. This shows that there are several marginal ideas besides some excellent ones. When the fund does not know what to do with the new money that comes in, it’s generally time to exit the investment and take it elsewhere. Whether it has 5 star rating or not is immaterial. A fund has got a 5 star rating because of its past performance and not because of its future performance. So 5 star or not, it’s time to look at the door.

4. Are your investments really diversified?

One of my readers had come across had around 40 funds with Rs 10,000 invested in each of them. Infosys was the common stock in 38 of his funds. This does not amount to diversification. Infact 20 stocks were common across 30 of his schemes. There was hardly any element of diversification. The point is having many funds does not mean you are diversified as funds often have similar kind of stocks in one’s portfolio. You can sell most of your funds if you find yourself in such a situation and keep only two funds with a good track record in each category diversified across fund managers, houses, type of stocks, sectors and style of investing. So take a hard look at whether a fund really complements your portfolio and exit where there is significant overlap between the funds.

5. Need Money for a Goal

This is one of the most important reasons to sell a fund. When you need money for a fund and you have achieved your targets, you can move partially 50% in debt or 100% depending on the market outlook. Since it is often difficult to time the markets, it is better to sell your fund and move into debt 6-12 months before you need money for a goal.


6. Rebalancing your portfolio / Moving into Cash or Debt

In today’s market, your equity allocation would have exceeded the figure that you like to have as a part of your portfolio. If this is the case, then you can either move some of your worst performing funds into debt / cash OR add additional funds to the debt part of your portfolio namely FMP’s. It’s best to undertake the asset allocation exercise as an annual ritual.

Finally before you press the Sell button, take stock of the tax implications and exit loads if any. If you can avoid tax by being invested for a few days or months, it makes sense to wait and then sell on completion of 1 year. However sometimes it’s good to exit (at the cost of paying short term capital gains tax and exit loads) if you have made substantial profits in a very short period of time or if the scheme is in deep trouble.

One of the biggest and most common reasons why people sell which I have not mentioned is the worry of market coming down and whether the markets can sustain at 15,000 levels. Well I don’t have the answer whether the markets will stay at this level in the next few days or will correct sharply as the Gloom Doom Guru repeatedly says on business channels. Market moves are random and one certainly cannot predict the next set of moves whether up and down with a consistent level of accuracy.

Corporate India’s report card will be out this week starting with bellwether Infosys and though corporate earnings will slow down from 30% plus levels to higher teen levels, a 15% earnings growth for the next 4 years remains a possibility. This can translate into a 12-15 % return by well-managed diversified equity schemes or for that matter even by balanced funds.

- Amar Pandit

The author is a practising Certified Financial Planner. He can be reached at amar.pandit@moneycontrol.com