Certified financial planner Gaurav Mashruwala shared his insights on mutual funds and advised on when one should exit them. "Generally, don't just move in and out of funds purely based on NAV movement or expense ratio or a fund manager," he said in an interview to CNBC-TV18.
Investors should keep a track of the fund performance and if the problems continues for more than two-three quarters, only then one should move out. Investor would not be able to capitalise on the gains, if he moves in and out of funds.
Below is the edited script of his interview with CNBC-TV18's Latha Ventakesh and Reema Tendulkar
Q: When should an investor sell their mutual fund? Should this be dependent only on the return or Net asset value (NAVs) or should things like change in a fund manager also affect their decision? Additionally what should they do when the fund exploits its mandate?
A: Changing of a particular scheme in your mutual fund portfolio should be dependent on two things. One is your own circumstances and second external circumstances. First let us look at own circumstances. If I have reached my target that is if I decided I want to create 'X' corpus and if I have reached that target then may be I want to redeem. That is one.
Two, if I have decided that my overall asset allocation in the portfolio should be say, 70 percent equity, 30 percent debt and because of market conditions, if there is some change in that then I may want to redeem and rebalance my portfolio. This is more concerning my own financial goal and my asset allocation.
Coming to external issues; as far as scheme specific things are concerned, performance should be an issue that should be looked into. For example if your fund is underperforming peers and the benchmark, which has been stated in offer documents for fairly long time, say two-three quarters then you may want to take a call of moving out of the scheme. That's number one. Two, if the corpus of the fund has reduced drastically, which means the expense ratio would go up then that's another call you may want to take.
If there is a change in fund manager then keep that fund on watch list because lots of these mutual fund companies would have a set of guidelines and overall principles based on which they invest. So don't straightaway start redeeming your money purely because the fund manager has changed. Keep an eye, look for two-three quarters, you may want to stop giving them additional money but redeeming purely based on fund manager moving out on immediate basis is not a good thing.
Q: What happens when the expense ratio of a fund increases? Is that reason enough to cash out or would you still think that you have to give the fund a chance to perform, may be with a smaller sum they outperform on other parameters?
A: The reduction in expense ratio predominantly will happen if the corpus has fallen because there is a clear cut guideline as to, up to what amount of corpus and what kind of scheme, and how much overall expense they can charge. So, if there is fall in corpus, this could be due to market condition or the money coming in. There could be increase in expense ratio unless there are new regulatory guidelines coming in. We had something recently coming up, where SEBI allowed fund houses to charge more.
Now purely because there is a fall for a short time, on an expense ratio because corpus has fallen, don't move out and keep observing. Generally, don't just move in and out of funds purely based on NAV movement or expense ratio or a fund manager. Obviously, keep an eye on that, keep a track of it and if you see there is problem for two-three quarters then move out. Because funds could have these problems in short-term but often in long-term they even out. So don't just jump at one particular occurrence and move out your money.
Q: Caller owns 350 units of Fidelity Mutual Fund, which have now been sold to L&T Mutual Fund. Should he sell his investments or continue in the new arrangement?
A: I would not want to get into scheme specific answer but generally as a rule of thumb, you may want to watch as to how the movement has happened and who is the new entity. If the new entity is stable, where they have existing presence and if the performance of their other schemes is good, then you may not want to straightaway jump out.
In this case, although I don't want to get specific but L&T is a stable, while the fund house is new, the caller may want to wait and see how the new thing happens and then take a call. That is the way it should be.
So, my general answer to all the investors is, do not keep jumping in and out of funds, more so equity funds because we invest into that for seven-nine years, a long-term period. So something that is happening for one-three quarters, just don't keep jumping in and out because in all probability things will even out. But by that time, having moved out, you will not be able to capitalize on the gains or the benefits that comes out.