3 signs that tell you to sell a mutual fund

Look at these as early-warning signals, which you can utilize to reach a decision faster


iStockPhoto
iStockPhoto

Usually, when a mutual fund is slipping, it may not be immediately visible to us. Your financial adviser or distributor may have got a whiff about it, but she too would usually wait for some more time—sometimes weeks or even a few months—to see if the slip is long drawn or just a temporary phase. It takes knowledge and a keen tracking sense to spot the danger signs. But, keep an eye out for these three signs. Look at them as early-warning signals, which you can utilize to reach a decision faster. 

Change in fund management 

One of the biggest reasons why some of the funds went out of Mint50—Mint’s curated list of 50 mutual fund schemes that we recommend to our readers (see the latest version here: http://bit.ly/2kATW0b)—was a change in fund management. It’s a bit tricky to spot news about your fund manager, because many wouldn’t even know or remember their fund manager’s name. But these days, news about fund managers regularly makes it to the newspapers. You could also ask your financial adviser about your fund manager; she would definitely know. 

Typically, your fund house would appoint someone else in case a fund manager quits. But sometimes these changes can slow down your scheme’s performance. And if there are too many changes in fund management, that could be a sign to sit up and take notice. 

Keep an eye on performance 

This is an obvious one. But remember a few things. No mutual fund scheme will do well at all times. 

Every scheme has its good and bad days. But if the bad days continue to persist for long, ask your adviser if there’s something fundamentally wrong with the scheme and how it is managed. 

How do you know if a scheme is doing well or not? Check your account statement. If you are continuously in the red—and by that we mean a few months and not just one or two months—and your fund underperforms the benchmark index, ask your financial adviser the tough questions.

If you invest through online platforms, you get a consolidated view of all your mutual fund holdings, and whether you are running a profit or loss in each of them. 

The right way to compare is to check your scheme’s performance with its own benchmark index and the category average, and an online view doesn’t give you all that. But at least it gives you a starting point: what is in the red can be clearly seen.

Fund size 

This one’s again a small indicator and not something that gives you a crystallized answer. But here’s what you should do. Typically, a fund’s performance can slow down once it becomes too big. Remember, not only is this not a certainty but there is also no such threshold of corpus beyond which a fund could possibly slow down. But, if it is a mid- or small- cap fund, then keep a eye on its corpus. 

When such funds cross around Rs3,000-4,000 crore in size, they tend to diversify in excess and that could result in a slowdown. Although there are mid-cap funds much larger than these that have been doing well, size can impact small- and mid-cap funds. Size doesn’t much impact large-cap funds.

More From Livemint