Four indicators to selling your scheme

Though we have told you to buy mutual funds (MF) throughout the year, it doesn’t mean that your investments are for keeps, especially those that are linked to—and move with—the markets. There are times when selling your MF scheme makes for a compelling case. We tell you four key events when you should clean your MF closet and weed out the ones you don’t need.

PerformanceWhen you invest in an MF, you would ultimately want to make money. But what do you do when your fund doesn’t perform? “Consistency of performance is important even though your MF schemes may not always be on top of the list,” says Rupesh Nagda, head (investments and products), Alchemy Capital Management Co. Ltd, a Mumbai-based wealth advisory firm.

As per data provided by Value Research, an MF tracking firm, schemes such as L&T Multi Cap have underperformed their category averages in all of the past four calendar years, beginning 2006 till date, that include rising as well as falling equity markets. JM Equity Fund underperformed the category average in the rising markets of 2007 (46.7% against a category average of 58.2%) and also in falling markets of 2008 (loss of 61.5% as against 54.3% category average).

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Franklin Templeton Dynamic PE Ratio Fund of Funds switches between equity and debt depending on the Nifty’s price-earnings (P-E) multiple. Higher the Nifty’s P-E, lower will be the fund’s allocation to equities and vice-versa. Typically, in rising equity markets, this fund underperforms equity-oriented balanced funds because it is mandated to automatically reduce its equity exposure and shift to debt. In falling markets, it invests in equity. So while in 2007, it underperformed balanced funds (27.42% as against 39.65% by balanced funds), it fell lesser (-25.53%) as compared with balanced funds (-37.14%) when markets fell in 2008. Moreover, the fund’s strategy seems to have paid in the long run; over the past five-year period, it returned 17.72% as against 14.9% category average of balanced funds).

Fund manager change

Fund houses would have you believe that it’s the internal processes that matter the most when it comes to performing well and not individual fund managers. While that is true to a large extent in India— as against in the developed countries where fund managers can really make a big difference—fund managers in India, too, could make a sizeable difference at times.

In some cases, new fund managers bring back a flagging scheme to life. After years of lying at the sidelines, Canara Robeco Asset Management Co. Ltd entered the top quartiles after Robeco, a Netherlands-based asset management company, picked up a stake in 2007. In 2009, Canara Robeco Equity Diversified Fund, under the aegis of Anand Shah and a revamped equity team, returned 93% compared with 78% average returns by large- and mid-cap equity funds.

However, cases like these are few and far between. Says Prem Khatri, chief executive officer, Cafemutual, a website offering MF news and information to distributors: “Ascertain how much of the performance of your fund is due to individual brilliance and how much due to an institutionalized investment process.” Khatri adds that if certain fund managers in a team are outstanding while others are average performers, it’s a bad sign. We suggest you give a year-and-a-half to your fund if there’s been a change of guard. A consistent slip in performance must trigger an exit.

Book profits

Several Mint readers wrote to us asking should they book profits as markets hit their all-time high last month. Many financial planners advocate investments even at these levels. “Long-term investors should continue; there are some very strong stories which continue to remain available at reasonable valuations. We believe we are at the cusp of a sharp rally as economies across the world realign and that economic data would strengthen from here,” says Sandip Raichura, business head (wealth management), Pinc Money, Pioneer Investcorp Ltd’s wealth management arm. In other words, continue with your systematic investment plans (SIPs).

The other way to look at it is from your asset allocation standpoint. If your asset allocation—depending on your risk and objective profile—is 60% in equities and the rest in debt and cash, and if your equities allocation has gone up to, say, 70% on the back of rising markets, book profits and bring down your equity exposure to 60% to your overall portfolio.

Keep an eye on your financial goals, too. Financial planner Gaurav Mashruwala says: “If you’re close to your financial goals, your asset allocation should change in favour of debt. Also if you have reached your targets, rebalance your portfolio. Change the portfolio based on your conditions and not on market conditions.”

For instance, assume you started an SIP in HDFC Equity Fund on 1 January 2000, investing ₹ 1,000 every month, say, to fund your child’s education that was to start in 2009. Satisfied with the growth the equity markets you would have enjoyed effective 2003, if you withdrew by the end of 2006, you would have got ₹ 4.02 lakh or 44.43%. If you had stayed invested till the end of 2008—and endured the market crash—you would have made ₹ 3.23 lakh or just 23.35%. Think of what a couple of years here or there could do to your funds.

Change of objective

Last, but not the least, when your scheme’s objective undergoes a change, you may want to consider a switch. Typically, this happens when your schemes gets merged into another one.

As per rules laid down by capital market regulator, the Securities and Exchange Board of India, unitholders of the acquired scheme are given a time frame of 30 days to exit without paying an exit load, if any. “Study the change of objective as if you’re investing afresh, for the first time. Understand the implications of the change on the fund’s management and the change in risk profile,” says Harshendu Bindal, president, Franklin Templeton Asset Management (India) Pvt. Ltd.

Change in objective may also come when fund management styles change. Sandip Sabharwal, former fund manager of JM Financial Asset Management Pvt. Ltd’s equity schemes, aggressively managed them. He liked to invest— early on—in small and mid-sized companies and hold tight portfolios of about 20 to 25 scrips. His strategy worked well in rising markets of 2007, but backfired when markets crashed in 2008. Sabharwal and JM parted ways in early 2009. Ever since JM has revamped its equity portfolios and now run their schemes much less aggressively than before. If you had invested in schemes going by a fund manager’s style, any change would usually warrant an exit.