When to sell a mutual fund?

Research is not only needed for buying a fund, one should also check to see if any fund in the portfolio needs to be sold. Hereís when you should sell your fund.

Kavya Balaji   /   February 28, 2020
sell a mutual fund

Invested in a 5-star rated fund? Then, you neednít worry about selling it, right? That may not be so. The 5-star rated mutual funds do not remain at the top forever. Mutual funds are subject to changes like any other investment. Their performance might drop or the fund manager might leave. Or even their strategies could change. This could lead to the need to sell your fund. That’s why you need to monitor funds from time to time. There are certain things you should watch out for just to check if you have to sell the fund. Hereís what you should look at.

Fund size

Everyone loves to buy popular products be it the newest fashion outfit or the latest mobile. Mutual funds are no exception. With many investors wanting to invest in the best funds, the assets of the fund become bigger. Just like a hefty man cannot run as fast as a man who is fit, a fund with a big asset size cannot trade as quickly as a fund with a small asset size. So, over time funds with a big asset size become slow. Their returns might come down to average from good.

This is why some funds decide to stop accepting new investments when their assets become massive. You need to check if the fund is performing as before and is in line with your return expectations. If not, you might have to look at a similar fund offering better returns.

Fund manager changes

Behind every successful fund there is an efficient fund manager. They make the buy, sell, hold calls.  The fundís performance largely depends on the fund manager. If the fund manager of your fund leaves, should you exit the fund? This may not always be necessary. Here are the points you should consider.

If you have been holding the fund for less than a year, itís best to wait so that you donít have to pay short term capital gains tax. Understand that there is no guarantee that the returns from the new fund you have chosen is going to make up for the taxes.

Another thing is that the new fund manager might be better than the old. Wait and watch how the manager handles the fund. You could even check his investing experience.

The most important point is that some types of funds are not as affected by manager changes as others. For instance, fund managers of index funds are not picking stocks. They do passive investing. So, manager changes for index funds are not as important as manager changes for an actively managed equity fund.

You need to think about selling the fund only when you learn a good manager leaves from a fund family that isnít very strong overall. You can hold on to the fund if the fund house has many talented managers and an excellent track record.

Takeovers

Mergers and acquisitions are part of the industry. Your chosen fund house may merge with another fund house or it may be taken over by a bigger fund family. Should you sell your funds? You might have to depending on the fund house that is dominant. Understand that there will be changes in the management, the responsibilities of managers, composition of board, etc.

The problem is that one fund manager might manage more than one fund. For instance, if a fund manager is asked to manage three/four funds, it may affect the performance of the funds adversely.

Another thing is that the policies of the fund family might change. For example, if a conservative fund family is taken over by an aggressive one, the fund managers are usually asked to be aggressive. Fundís investment objectives might change. Sometimes new fund offerings might have more attention than other funds.

So, mergers and acquisitions can lead to a slowdown in performance of the funds. It takes some time for things to settle down. So, you will need to do some research on the fund house before you choose to exit the fund.

Tips

Selling a fund is an important decision and you need to keep track of your funds to understand when you need to do that. Hereís how you can do it.

  • Regularly visit fund house websites looking for news
  • You can visit SEBI for more information on the fund family.
  • Read analysis that appear in financial websites and newspapers to remain updated on the changes in the fund and the fund family.
  • Read reports on the funds every now and then to know things like the asset size of the fund, fund manager changes and strategy changes.

If you have any doubts, ask questions. Asking questions will help you understand things better. You can even take the help of a financial planner who will help you track your funds. For instance, at Wealthzi, we help you choose funds that suit your risk profile and financial goals. Our wealth consultants are also available for personalised consulting if you need help on purchase and sale of funds or any investment products. Needless to say, we also help you monitor your fund, thus saving time and efforts for investors. So, remember to stay updated about your funds.

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