But Shrinivas doesn't want to redeem it and switch to a better option because he feels it's his father's gift to him.

While such emotional attachment is obvious, it isn't intelligent always. After all, his father would have never appreciated his wealth getting destroyed year after year.

#Case 2

Rahil invested in a mutual fund scheme for last 7 years through Systematic Investment Plan (SIP) to finance his son's higher studies. 

His son has fared well in the entrance exams and has started applying at premier colleges. The markets are near all-time high now and look overvalued.

Rahil is making good 15% compounded annualised return on his investments, but he is still reluctant to liquidate them thinking why kill the goose that lays the golden egg?

Instead, he prefers to take up a loan at 12. He believes by doing this he's making a straight gain of 3%.

#Case 3

Shalini had terrible experiences with most of the investment advisors she dealt. Most of them mis-sold her financial products.

Thankfully, her nephew started his financial advisory about two years ago and suggested her a few mutual fund schemes.

But soon after he got lucrative work opportunities abroad he shut his shop back home and accepted the job offer. Now Shalini is in trouble again.  I am not going to sell anything from my portfolio unless I need money. At least I am sure what my nephew recommended me are good schemes.  

Last month a scheme in her portfolio announced some fundamental changes in its attribute. Ideally, Shalini should have reviewed her portfolio; but Shalini did nothing.

Moral of all stories

Do you know what's wrong with Srinivas, Rahil and Shalini?

Their approach.

They all are taking emotional decisions about their mutual fund investments, and this is indeed bad for them.

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You shouldn't get stuck to a mutual fund scheme emotionally. Don't have qualms about redeeming mutual funds, if it's required. 

(Image source: thebluediamondgallery.com)

Hence, the best time to sell your mutual fund investments is when:

1. You have met your financial goal 

   This is the primary reason why you should sell your mutual funds. If your equity funds delivered better than expected returns, you may end up reaching your goal before the target date.

   On meeting your goal before the target date, you can redeem your equity mutual fund units and put it in low risk assets such as liquid funds. This will retain the value of the portfolio until the time you need to withdraw it to fund the goal.

   If you have not set financial goals, here's how to do it:

You may also need to dip into your mutual fund portfolio when there is an emergency. At such times, it would be prudent to redeem funds from low risk assets first, such as liquid fund and short-term debt funds, before moving on to riskier equity funds. Because during an emergency if equity markets are at a low, you may end up withdrawing at low returns and miss the potential of higher returns in the future.

3. Your mutual fund scheme underperforms

   We all make mistakes. Your mutual fund investment may not live up to your expectations because either you made a mistake to start with, or a genuinely good mutual fund started deteriorating in performance.

   At times, even a carefully selected mutual fund may underperform. The fund manager's investment bets may have not yielded the best returns.

   You need to review the performance before dumping the mutual fund scheme. To get your portfolio back on track, you may need to sell your funds and invest in better-performing, diversified equity funds.

   Returns of market-linked investments are volatile and may not always give you the returns you expected. So instead, compare the returns of the scheme to its benchmark and other peers in the category. Continue to hold on to a scheme, if the performance fared comparatively well.

   However, if the scheme has underperformed compared to its peers and the benchmark , it may be indicative of an underlying investment issue, and you could sell your units. 

4. There is a change in the fundamental attributes or investment objective of the scheme

   The mutual fund industry is under constant change. As seen recently, the regular mandated proper categorisation of mutual fund schemes. Only one scheme is allowed per category.

   Hence, to meet these guidelines, the fund house may need to alter the schemes investment objective or merge the scheme with others. Such amendments may induce you to sell. However, before doing so, you need to judge the long-term impact.

   At times, a change in fundamental attributes may rarely necessitate any action. For example, after the regulator allowed mutual funds to invest in Real Estate Investment Trusts (REITs), certain schemes altered the asset allocation mandate such that it specifies an allocation to REITs as well. However, this amendment just provides an enabling power to the fund and may not necessarily translate into investments in REITs.

   But if the fund is moving from an aggressive asset allocation strategy to a conservative one or vice-versa, this is a reason to worry. This happens mostly with scheme mergers. In such cases, you need to review if the revised asset allocation or investment strategy meets your risk profile and investment objective. You can always seek the assistance of a financial planner in such cases.

   A change in fund manager, too, needs to be examined carefully. However, you should note that the investment process involves an entire team. Therefore, if a fund manager quits, the investment team may be equally competent to meet the investment objective of the scheme. Therefore, you should give the new fund management time. If after a few quarters or more, the performance of the scheme fails to live up to its performance mark, sell it.

5. You find a better alternative

   You may have started your journey with mutual funds through tax-savings schemes such as Equity Linked Savings Schemes (ELSSs). However, now that the three-year lock-in period is over, you are unsure whether to hold  or redeem it. While some tax-saving schemes have turned out to be top performers, giving open-ended equity diversified schemes a run for their money, most other schemes have fallen short (even though they may rank among the top in the ELSS category). Thus, you may consider switching your investment in an ELSS to better performing equity diversified schemes.

   In the same way, if you can bear the additional risk, you may want to sell your investments in a balanced fund to reinvest in a large-cap fund or even a mid-cap fund based on the long-term wealth creation potential of such schemes.

The market constantly goes through short-term phases of euphoria or panic. But historical data shows, over the long term, it has always moved up. This is why you need to base your buying and selling decisions not on the whims and fancies of the market, but on your financial requirement, your goals, and the underlying performance of the scheme.

Sell your mutual fund units only if your reasons include the five highlighted above.

Buying and selling mutual funds employs a complex decision-making process. This may be extremely tedious and time consuming for the average saver.

Any merit in seeking advice from robo-advisors?

Yes, Certainly!

Unlike humans, robo-advisors aren't swayed by emotions and their decisions are always based certain pre-set parameters which make them more dependable than majority of human advisors.

That said, a robo-advisory platform shall be backed by sound and unbiased research parameters and methodology to select and de-select mutual fund schemes.

Currently, PersonalFN is on the verge of launching an ultimate robo-advisory platform which will provide only Direct Plans.

Stay tuned.

Happy Investing!

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