When to Say Good Bye to your Mutual Funds? - Part - III

When to Say Good Bye to your Mutual Funds? (contd.)

Comparative evaluation of the fund in question is the final trigger that goads you to say good bye to your fund.

Consistent underperformance

It is important to base your decision on relative performance. You should compare the fund’s performance against the most appropriate peer group - other funds which have similar investment objectives or strategies. Comparing "apples to apples" is the only fair way to see if a fund is doing well or underperforming. Moreover, if your growth fund lost money in any year, it may not be such a bad thing if the index lost more than that. But the key is to look at long-term returns. In the short term there could be a genuine reason for under-performance - some of the investments may be from a long-term perspective; certain sectors may have been under-performers; contrarian investments take time to catch market fancy, etc. But if the performance of the fund continues to be consistently below par over long periods of time, then it may be worthwhile considering switching over to a better performing fund. If possible, you should also try and assess the reasons for poor performance. Exceptionally poor comparative performance should be a signal to sell the fund.

Increase in fund expenses

Increase in fees to the manager represents a reduction of income to you and is unlikely to be offset by higher returns. When a fund expense ratio rises significantly, particularly in bond and money market funds, look at moving to a lower-cost alternative where expenses will not be a principal factor in the fund’s performance. For many funds back-end loads tend to be higher when you liquidate your units earlier rather than later. So you need to determine if liquidating your units now is optimal.

Change in taxation policy

A change in the tax policy could become a reason to sell and reinvest somewhere else.

You invested in the balanced funds since your risk profile is such that you can take around 50:50 equity to debt exposure.. But when the tax laws changed wherein a fund would classify as an equity fund only if the equity component is more than 65%, the balanced funds would have to increase the equity component to 65% so that they continue to enjoy the lower tax applicable to equity funds. But with 65% equity it becomes riskier. Hence, it could be time to exit.

If your fund has suffered significant capital losses and you need a tax break to offset realized capital gains of your other investments, you may want to redeem your mutual fund units in order to apply the capital loss to your capital gains.

Selling a mutual fund isn't something you do impulsively, without a great deal of thought and consideration. Remember that you originally invested in your mutual fund because you were confident in it, so make sure you are clear about your reasons for letting it go. However, if you have carefully considered all the pros and cons of your fund's performance and you still think you should sell it, do it and don't look back