"Our favourite holding period is forever." This comes from the world's most successful investor, Warren Buffet. This also answers the question that forms the title of this article.
Therefore, before addressing the issue of when to sell your mutual fund, let us for a brief while dwell upon when not to sell it.
Most investors sell or at least reduce their stock exposure when valuations start falling. The market fell from 12,612 all the way to 8,929, a fall of almost 30%. How many investors refrained from selling during the interim? And how many investors actually made additional purchases?
And who amongst us knew that within four months the market would actually catch up with and even surpass the previous peak?
The answers lie in the questions themselves and therein emerges a lesson that we can all learn. And this lesson is best summarized by the following quote by Bernstein William in this book, The Intelligent Asset Allocator:
"There are two kinds of investors -- those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type -- the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know."
History has repeatedly proven that it is impossible to 'time' the markets. The Bombay Stock Exchange's Sensex is flirting with the 13,000-mark even as I write this. But no human being is capable of knowing for sure when the milestone would be reached. And when it does, nobody can tell for how long will it be able to sustain that level.
So, if you invest or divest based on market movements or expected market movements, it amounts to pure speculation. And know this much -- you can either speculate or accumulate, but never both.
Which brings us back to where we started from. Just when do you sell your mutual fund?
Under Performance?
Yes, investing is all about long term. However, it has to be the right investment in the first place. Study the performance of your funds against their peer group and also the benchmark returns. Say, your fund has gained by 10%. While you may be happy, this doesn't actually tell you much.
To put the fund's performance in perspective, you have to compare and contrast it against its peer group as also to the benchmark returns. Be careful in selecting the correct peer group. One should not compare an equity diversified fund against a sectoral fund or a large cap fund against a mid cap aggressive fund.
Also, take care that you gauge performance over a reasonable period of time. Most information sources publish three month figures of fund performance. Three months is too short a time to come to any conclusion.
Moving on, another reason that you sell your investment is if it doesn't remain the same investment.
Change in the fund composition
For instance, balanced funds earlier qualified with a 50% exposure to equity. Now, as per the new tax laws, at least 65% ought to be invested to equity. Most fund managers, in an effort to spike the return, even take a higher exposure. Therefore if the investment has become riskier than what you would be comfortable with, it is time to sell.
Change of fund manager
Mutual fund companies will argue themselves hoarse that fund management is a process driven activity and the individual doesn't matter. However, successful stock selection is a matter of experience, perspective and instinct. These are human qualities that cannot be completely reduced to a process.
The fund manager's exit does raise a red flag. However, it could also be possible that the new guy is better than the earlier one. So keep the fund under your radar. A discernible blip in the performance may mean it is time for you to desert the ship too along with its erstwhile captain.
Realigning Asset Allocation
Every investor has his or her own risk tolerance. Say, you are comfortable with 50% of your funds invested in equity. Time to time, you need to check the asset allocation. With a substantial run up in equities, chances are that your total portfolio has become distorted towards equity. To bring it back, you would need to sell.
Here take care of the fiscal side. While selling, it makes more sense to sell funds over one-year old for the associated tax break in capital gains.
We have established so far that amongst all the reasons for selling your funds, falling or rising markets should in no way influence your decision. If anything, if the markets start falling, please buy additional units -- the cheaper deal will hold you in good stead eventually.
However, what if you need the money?
This then forms the foremost reason to sell any investment.
Apart from must spends like for medical emergencies or, say, escalating education costs, do once in a while indulge yourself. Take that foreign trip that you so wanted. Buy that new mobile. . .
You live only once and what is the point of all this if you can't pamper yourself once in a while? The other day, I bought myself an iPod, which might be a necessity for some. But a limited edition version with more gigabytes than I'll ever have time to listen to was perhaps overdoing it. But, hey, if you have to do something wrong, at least do it right!
The writer is Director, AN Shanbhag NR Group. He may be contacted at sandeep.shanbhag@gmail.com
