The Hindu Business Line : Fund Talk

I am new to mutual fund investments and do not have the time to regularly monitor the portfolio. What is the right time to sell and when should one book profits?

Ravi Nagar

Mumbai

While there is no dearth of information on which fund to choose for your portfolio, it can be a tough job when it comes to bidding farewell to your fund. We list below some common reasons that can act as a trigger for selling your funds.

Nearing your goal: Sometimes, even a performance-perfect fund may still have to be cut loose from your portfolio. No easy choice, but when you are nearing the financial goal for which you initially chose the fund, there is little else you can do. Suppose you are nearing the goal of buying a car, you need to protect your capital and returns earned so far by slowly switching to various modes of debt. Although the fund may have done a good job, the stock market, being volatile, can reverse the picture temporarily and play havoc with your plans. So, when the going is good and you have a need, simply cash out. Retirement is another example. Say, you have five years to go for retirement, you may consider switching to more conservative funds or asset class as capital protection may assume priority.

Underperformance: Although a very valid reason to switch, this is where many investors get it wrong. How to gauge underperformance? Always remember the thumb rule — do not calculate performance over too short a period and do not compare apples with oranges. Your fund may have returned 60 per cent in a year. You are richer, no doubt, but does it reveal anything? Always look at the relative performance. Study the returns of your funds against the fund's benchmark and then the peer group. A fund that consistently lags its benchmark may be a clear exit candidate.

While comparing with peers, choose comparable funds. Do not compare a diversified fund with a sector fund. The sector fund may have cashed in on the boom in that sector while a diversified fund may not have the same level of exposure. The former would have assumed higher risk to earn that return, while the latter would have limited its risk.

The three-month performance numbers may be deceptive, as it is too short a time to get the fund's true measure. Look at the one-, three- and five-year records. If a fund with a good track record has under performed over a one-year period, try to understand why it has done so. For instance, a number of mid-cap funds now sport a lacklustre one-year return as they are bearing the brunt of the market correction in May. You may lose out on the long-term story, if such blips distract you.

Keep watch of fund management: Remember, a change in fund manager in an actively managed fund (not being an index fund) by itself does not warrant a switch; nor do brief periods of under-performance immediately after a new fund manager assumes charge. Change in the management style leading to poor performance over several quarters would call for a decision from your side.

Change in fund size and objective: When a small-cap fund suddenly encounters a huge asset base, it may face liquidity issues and lack of adequate investment opportunities to diversify. Keep a watch on the swelling asset size in funds that require a more focussed approach or investing style. You may have purchased a mid-cap fund with high risk-return objective but find the fund slowly and over a period donning a large-cap bias. At this stage you will have to reassess the need to stay invested in such a fund that no longer serves your original objective. It will help you evaluate whether your need and investment appetite has changed and that the re-classified fund fits your portfolio or not.

Please note that all this calls for periodic (though not active) portfolio assessment and a discerning eye for any piece of information that may have a bearing on your investments.

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

Vidya Bala

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