All of us who put in their money into mutual funds (MF) know that there are thousands of MF schemes in the market. Hence, it can be really hard to select the right one for investment purposes. Another task that can be somewhat even more difficult is the choice of when to sell off the funds and which MFs to sell.
It is a rather funny fact that the above problems are usually faced by investors who are more engaged and more knowledgeable about the markets. One of the reasons for this is that engaged and active investors generally tend to have a constant desire to do something or the other with their investments. These types of investors often do well, usually due to their tendency to analyze, learn, and act quicker and better as compared to others. However, in doing so they begin thinking that doing anything or something are the hallmarks of being a good investor.
We may sell off mutual funds for a variety of reasons, but all such reasons may be based on sound financial logic. The good reasons for selling mutual funds generally tend to be based on the personal financial needs of an investor, while the incorrect reasons often have their basis in the status of the fund that they have invested in.
The three main reasons listed out by overactive MF investors for their urge to sell off a mutual fund are:
- They have incurred losses
- They have made profits
- They have neither made profits nor losses.
It can be inferred from above observation that investors who seek nonstop action may conjure up some kind of logic for actions that they may take in any type of situation.
What are the correct reasons for selling off mutual funds?
None of the reasons listed above can be construed as the correct reasons for selling off mutual funds. On their own, they cannot be considered as justifiable reasons for getting rid of a MF.
The first reason of making a profit is based on the poisonous concept of ‘booking profits’ which has been promoted by many advisors. The concept does not make sense when taken into account for stock investments, and it make far less sense with regards to MF investments.
The fundamental aspect of mutual funds is that the decision to buy and sell off different stocks rests on the capable shoulders of the fund manager. If the fund manager does a good job of portfolio management, then it will by default lead to good returns on investment. Thus, if you sell of MFs that are offering good yields, then it will be the exact opposite of the principles of investment.
As regards to the second reason of incurring losses, it can be reasoned that selling off MFs that are underperforming is valid. But it is very important to gauge the under-performance of the MF against the extent of the loss and the associated timeframe of bad performance. Only then will it be possible to arrive at a true understanding about the value of the MF. If a specific MF investment has offered returns of around 20 percent, but some other funds have yielded increased returns of 25 percent, then selling off your funds and moving to those other funds does not make sense. This is because moving your investment from one MF to another according to the performance of respective funds over the short term often tends to be counter-productive.
One should sell off a mutual fund only when it has consistently under-performed for 2 years or more as well as when its rating drops by 2 notches. The correct way to take a decision about sale of funds is adherence to a risk adjusted, comparatively long-duration rating system.
What is the right time to sell off a mutual fund?
Investors have to take into account their personal financial goals when thinking about selling off their MF investment. You may sell the fund and take the money when there is a requirement for it.
Take the example of an investment in mutual funds for a period of 5, or 10, or 20 years. You may have made that investment for the specific time period taking into account your current and future income streams. It will be a good time to sell off the MF when the corpus amount has grown to the size that you had set the goal for. Thus, if you had set the goal that you had to invest for 10 years to get a corpus of 20 lakhs and if you reach that goal in around 8 years, then it would be a good reason for you to sell off that fund after 8 years and not wait for another two years.
You can also sell off the MF before you reach the goal in case you are in need of money for paying for the education of your child, for the down payment of a home, etc. This decision to sell of the MF cannot be dependent on the state of the MF, profitable, or non-profitable, or stagnant.
If the expenditure for which you have to sell off the fund cannot be postponed, then it is best to begin the process of disinvestment sometime before the complete sale. You may begin withdrawing money from the MF one or two years before the sale and park it in some other liquid fund. You may opt for an automated systematic transfer plan or STP as it will help simply the process.
The main aim of MF investments is not the act of investment but the action of selling it. This is because of the fact that only when you sell off the MF investment will you be able to achieve the goal of the investment. This root point has to be taken as the guiding factor when trying to understand the right time for selling off mutual funds.