When to sell a mutual fund?
Mutual funds are portfolios of financial instruments such as stocks and bonds chosen by a portfolio or fund manager in accordance with the fund’s strategy. An advantage of this portfolio of assets is diversification. Typically, investors tend to compare the returns yielded by their mutual fund units with other funds or stock markets. In case the returns are lower, investors usually exit the investments without much investigation. Mutual funds are not synonymous with stocks as stocks are single entities with rates of return associated with what the market will bear, whereas mutual funds are diverse portfolios rather than single entities, hence relying only on market timing to exit mutual funds may be a useless strategy since a mutual fund’s portfolio may represent different kinds of markets. The key to successful mutual fund investing is to know when to hold them and when to fold them. The following situations are indicators which an investor should note and take into consideration for exiting his mutual fund investments.
Change in fund manager
An investment in mutual fund tantamount to put certain amount of trust in the fund manager’s expertise and knowledge. If the annual or quarterly statements reflect change in a fund manager. Investors should pay attention to the fund’s performance and also research on the new fund manager’s past experience and performance. The prospectus indicates the reason for change of fund manager by the mutual fund.
Change in strategy
If the fund manager starts to invest in financial instruments that do not reflect the mutual fund’s original goals, the investor may want to re-evaluate the fund that he is holding. For example, a small cap fund starts investing in large cap stocks. Sometimes fund changes its name, with that its investment strategies may also change. Consistent underperformance
If the mutual fund returns have been poor over a period of less than a year, liquidating holdings in the portfolio may not be the best idea since the mutual fund may simply be experiencing some short-term fluctuations. However, significantly poor performance over the last two or more, it may be time to cut losses and move on. To help this decision making, it is recommended to compare the fund’s performance to a suitable benchmark or to similar funds. Exceptionally poor comparative performance should be a signal to sell the fund.
The fund becomes too big
In many cases, a fund’s quick growth can hinder performance. The bigger the fund, the harder it is for a portfolio to move assets effectively. Note that fund size usually becomes more of an issue for focused funds or small-cap funds, which either deal with a smaller number of shares or invest in stock that has low volume and liquidity
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