Be Sure-Footed While Selling

While managing your mutual funds portfolio, remember that the point at which you exit a fund is as crucial as the buying decisions that you make.

KEY POINTS

• Today, more and more investors are following the recommended process with regard to investing in mutual funds. However, when it comes making a selling decision, many investors still do not exercise the same discretion.
• There are three occasions that should necessitate a selling decision. First, sell a fund if your investment plan requires you to do so. Secondly, sell a fund if its performance has not been satisfactory. Thirdly, consider selling a fund when it no longer meets your investment needs.
• You must have a strategy to sell just like you would have one to invest in mutual funds. This will help you avoid the temptation to time the market while selling, i.e. to sell before the market goes down and buy before it goes up.

There has been a marked improvement in the way individuals invest in mutual funds. Gone are the days when investors would invest in each New Fund Offering (NFO) in the hope that the at par NAV would fetch them high returns. Today, more and more investors are following the recommended process of first deciding their asset allocation and time horizon and then selecting the funds that can help them achieve their goals. The fact that mutual funds provide adequate diversification for each of the asset classes makes it a perfect choice for them.

However, when it comes making a selling decision, many investors still do not exercise the same discretion. It is important for investors to realise that abrupt and irrational selling decisions can severely dent the long-term prospects of their investments.

If you are a mutual funds investor, it is important to learn how to manage your selling decisions. This is what you need to know:

Sell When You Need To
Broadly speaking, there are three occasions that should necessitate a selling decision. First, sell a fund if your investment plan requires you to do so. For example, if you have invested in a fund with a time horizon of five years, you would need to sell it after the completion of that period. However, if it happens to be an equity fund, the selling should be done in a phased manner. This process should begin three-six months prior to the completion of the time horizon to protect your gains.

Secondly, investors should sell a fund if its performance has not been satisfactory. Remember, the performance of a fund can be measured vis-a-vis its benchmark as well as its peers. In fact, it is always better to compare the performance with the peers as it gives a better picture. However, while analysing the performance it is important not to rely on short-term performance. If a fund has lagged behind its peers consistently for a period of say a year or more, it may be a good time to dump it.

Thirdly, consider selling a fund when it no longer meets your investment needs. This situation would generally arise only when the fund’s objective or investment style is changed or if it gets merged with another fund. Remember, the key to long-term success is to ensure that your portfolio consists of only those funds that suit your needs at all times.

Avoid Panic Selling
One of the factors that play a key role in mutual fund investing is your time horizon. When you invest without a definite time horizon in mind, you may not be prepared to tackle market volatility and may feel compelled to make abrupt selling decisions. It is quite common to see investors abandoning their carefully designed investment strategies as a knee-jerk reaction when faced with the vagaries of the stock market. Needless to say, in the long run, they pay a price by following this kind of haphazard approach.

The fact, however, remains that the stock market can go up and down during certain time periods. Of course, it is important to put volatility in perspective for those who are not familiar with the equity markets. For a disciplined investor, market volatility provides great opportunities to benefit from ‘averaging’. Therefore, the key is to recognise that volatility exists in the market place and will remain so. While volatility can be described as a natural phenomenon, investors need to develop ways to deal with it.

In other words, you must have a strategy to sell just like you would have one to invest in mutual funds. This will help you avoid the temptation to time the market while selling, i.e. to sell before the market goes down and buy before it goes up. Remember, whenever you try to do that, you will invariably find the market moving in the opposite direction. Even the most experienced fund managers cannot predict the short-term movements of the stock market.

Therefore, the best strategy for a common investor is to invest for the long term and to follow a disciplined approach to investing. If you select your funds carefully and invest with a clear time horizon, a ‘buy and hold’ strategy can work wonders.

Hemant Rustagi
CEO, Wiseinvest Advisors