What is the right time to say 'Sayonara' to your MF scheme?

While it is very difficult to find a right scheme of a mutual fund for investment, equally difficult is to find out the right time to exit from that scheme. The challenge arises from two aspects. One, if the scheme is performing how much is too much. Two if the scheme is found to be non performing or performing below average, what should be done. It has been often observed that investors exist from performing investments very fast while they stick to non performing investments for long time. Considering all these dilemmas, what should an investor do? In other words, what is the right time to say ,’ Sayonara’ to your mutual fund investment? Here is a list of such scenarios:

If your mutual fund scheme fails to beat risk free return for three consecutive years: By investing in a scheme of mutual fund, an investor takes risk. While it is true that it takes time for a mutual fund scheme to perform and deliver, three years is a good enough time to test the mettle of a scheme. If you are not able to get return equivalent to risk free rate, then it is right time to part company with the scheme. It is important to note that risk free return means the return offered by a three to five year government security here. In case you are not able to analyse the return offered by government security, another investment (though not risk free in the same context) is the bank deposit interest rate for three years term. Risk free return generally takes care of inflation as return offered by these schemes is generally equal to rate of inflation.

If your mutual fund is unable to beat the benchmark index against which it operates: Every mutual fund scheme operates against a benchmark index. This index helps an investor understand the performance of a scheme. Ideally a mutual fund should outperform the index if it is a well managed scheme. However in such cases when mutual fund scheme has failed to beat the benchmark index, it is time for serious introspection. Even if the scheme is able to beat risk free return but unable to outperform the index against which it is operating, it is time to have a relook at the investment. However, if your scheme has outperformed the benchmark index but failed to beat risk free rate, you can give time upto three years to the fund.

When a scheme overgrows in size or the corpus of a scheme dwindles: In the world of mutual funds, too large is as much a challenge as too small. If a mutual fund scheme grows too large in size, then managing the fund is difficult for the fund manager. On the other hand, if the scheme is too small, benefits of diversification can be limited. Also the fund may face sell off, if there is a very nominal redemption pressure. In the current market scenario, finding a large mutual fund scheme is difficult but there are many schemes whose size has diminished substantially over a period of time.

When the fund manager running the show moves out: ‘Mutual fund investments are subject to fund manager’s competence, know your fund manager before investing’ would be an apt quote to signify the importance of fund manager. Fund manager is a mutual fund is same as a director in a movie. Some of the fund managers have knack of picking right stock at the right time and that is what works wonderfully in favour of a mutual fund. Since stock selection strategy works consistently, a fund manager becomes reliable. So if your fund manager moves, it is time to move investments from fund as well.

Any significant change in mutual fund attributes: If a mutual fund undergoes a merge or takeover, you need to be extremely careful. One example is the recent takeover of Fidelity Mutual Fund by L and T Mutual fund.  In event of selling/takeover/merger, there is a high probability that the fund house or specific schemes may lose direction which will not be in the interest of investors. Similarly change in investment objectives, fund allocation and investment strategies of a mutual fund need to be carefully watched out.

Investment in a mutual fund scheme does not mean that somebody else will take care of your investments and you need not worry. You need to be more watchful and circumspect when you hand over somebody else to manage your money. So be watchful and change the scheme before it is too late.