Many investors take care when investing in mutual funds, but act in a haphazard manner when selling. One often come across investors trying to time the market in other words, trying to sell before the market goes down and buy before it goes up. Itâ€™s equally common to see that, whenever they try this, the market moves in the opposite direction to what they anticipate. Not just lay investors, even experienced fund managers find it hard to time the market consistently.
While equities are meant to be a long term investment option, different investors may have different reasons to sell. Whatever the reason, a proper strategy is essential, so that decisions are dictated by logic rather than emotion. Below, we analyze a few situations that may prompt investors to sell, and also discuss good selling strategy.
For many investors, the problem begins with buying into a mutual fund funds scheme. If theyâ€™re unclear about what to look for in a scheme, they may end up investing in every scheme that does not match the investorâ€™s objective or risk profile.
The right way to develop a portfolio is to follow certain basic principles and allocate money to different categories of schemes, whether equity or debt. While selecting equity funds, itâ€™s vital to consider factors like exposure to various segments of the market, investing strategy, performance and portfolio turnover. For debt funds, it could be the load structure, annual expenses and the maturity period of the portfolio. Itâ€™s also important to know what returns to expect, and how to measure performance. A mixed assortment portfolio will require some pruning. One can begin by selling funds lag behind their peers. However, before taking a decision one should consider certain important factors.
While analyzing mutual fund performance the most important thing to remember is that various segments of the market large, mid and small caps perform differently at different times. As the tide shift in favor of a particular segment, the performance of funds focusing on that segment improves dramatically. To identify non performers, compare the schemes in your portfolio with others in the same category over different time periods. Remember performance is best measured in terms of total returns. The total return is the percentage of change in the net asset value (NAV), with the ending NAV being adjusted to take into account dividend distributions made by the fund
If some of ther non-performing schemes are about to complete one year in the near future, itâ€™s best to phase out the redemption /switching process so that the investor can avoid short term capital gains tax.
One should hold a fund long enough to evaluate its performance. Many make the mistake of either holding on for too long or selling in haste. Do a thorough analysis before deciding to sell. Be sure to have given a fund time to show what it can do. Thatâ€™s way the track record of the funds in the portfolio needs careful consideration. Focus on the long term track record, as it moderates the effects that unusually good or bad short term performance can have on a fundâ€™s performance. It also compensates for the effects if a fund mangerâ€™s investment style, and lets the investor gauge how disciplined his or her approach to investing is. The pressure to perform can make a fund manager susceptible the urge to change tracks in terms of stock selection and investing strategy. In other words, while analyzing performance the investorâ€™s objective should be to distinguish between the fund managerâ€™s investment skills and plain old luck.
Another factor that sometimes prompts investors to sell in a hurry is market volatility. Every time the markets turn volatile, many investors abandon a carefully designed investment strategy in a knee jerk reaction and start selling. In the long run they may end up paying a heavy price.
Remember, the stock market can go up and down at various times. For those who are not familiar with equity markets, it is important to put volatility in perspective. The fact is that one has to contend with volatility, no matter what instruments one invests in. Even conservative investors in debt instruments have to tackle interest rate fluctuations.
The key is to recognize that volatility exists in the market place and will remain. While volatility can be described as a natural phenomenon, investors need to find ways to deal with it. One such strategy is to rebalance oneâ€™s portfolio periodically. Rebalancing is a method by which the allocation to debt and equity are restored to their original levels. This is necessary, as different asset classes grow at different paces. Rebalancing is necessary, because we make investments to achieve best results at a level of risk we consider acceptable. If we take no steps to rebalance our portfolio, we end up being exposed to an unacceptable level of risk.
Still another reason investors sell is when a fund outlives its utility to them. It could be because of change in the investorâ€™s needs, or her risk profile or time horizon. A situation like this requires a careful examination of the changed circumstances, and then realignment of oneâ€™s portfolio.