Is it time to say Goodbye to your fund?

Change in taxation policy

A change in the tax policy could become a reason to sell and reinvest somewhere else. (Also read - How to optimize your tax using mutual funds?)

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

Change in Fund-Style or Objective

We invest in a fund with a particular objective or style in mind. Suppose, we already have exposure in mid-cap funds and in order to diversify our portfolio, we choose a large-cap fund. However, after some time we observe that the fund is taking exposure in mid-cap sector too. This increases our overall exposure to mid-cap. Thus it may be time to sell and move to a truly large-cap fund. (Also read - 5 corners of a sound Investing Strategy)

Or say, we choose a fund for its' passive style of investing. But later the fund manager starts following an aggressive style with frequent churning. If this style does not suit our risk profile, it may be the time to say goodbye to such a fund.

Or take the case of some technology funds. These came at the time of tech boom and subsequently fared very badly. However, at Rs.4-5 NAV these looked quite attractive from a long-term perspective and some investors, confident of recovery in the tech sector, invested in these funds. But in the meantime, the AMCs in their anxiety to improve the performance of such funds, changed the investment objectives. This defeated the very purpose with which some investors had taken exposure in these funds; and hence had to consider exiting.

Change in the Fund Manager

When investing, one of the criteria is to evaluate the expertise, knowledge, experience and past performance of the fund manager.

However, while the fund manager is a key player in managing our money, one should not forget the contribution of the research team, the investment committee, the top management and AMC's investment philosophy.

Therefore, a change the fund manager need not necessarily mean exiting the fund. But it may be worthwhile keeping the fund under a close watch. If there is a perceptible decline in the performance, one could consider selling.

Change in the Fund's Size

Sometime the size of the fund starts affecting the returns. As we have also recently seen that certain mid-caps funds took a voluntary step to stop accepting fresh money into the fund, when the size became too large to manage. This is because (i) the mid-cap space is limited (ii) even small purchase of such stocks sent their prices soaring and (iii) too large a holding in such stocks will be difficult to offload when required. (Also read - Investing situations that cause Panic)

Here, of course the funds took a proactive step to protect the returns of the existing investors. But if the funds themselves do not take such a step, we investors should keep track of the fund sizes.

The moment they become too large to manage or say too small to capture new investment opportunities, it may be time to exit.

There could, of course, be other reasons to sell, more specific to one's circumstances. The basic idea is to define, beforehand, certain rules for oneself for selling one's investments. This would reduce the day-to-day dilemma and ad-hoc decision-making, thereby make investing more scientific and unemotional.