Mutual Fund – Buy, Hold, Sell?

In a well-executed plan, reviewing your portfolio and taking the right actions is as important as, if not more important  than, the initial selection of investments. In India, you can assume that the choice of mutual funds during review is more than the initial choice of mutual funds. (The mutual fund industry in India is still in the growth stage and more AMCs and more funds are launched periodically.)  I give a quick way to evaluate YOUR mutual fund investment against the most critical performance factor.

Reviewing mutual funds

Recently in Quora, a user asked this question – How do I choose whether to hold or invest more in any mutual fund scheme?

Almost all investors would face this question when they review their portfolio.
Let us assume that you have made the initial selection after a good analysis and have a clear expectation. An example of a clear expectation: I have chosen fund F as the equity portion of my corpus for Goal G, which is Y years away. Over this period, I expect a CAGR of C from this fund. (Hopefully C has been compared with the benchmark B and is not overly optimistic.)
Let us also assume that you are doing the review after a year. (It doesn’t help to do the review monthly or quarterly, particularly when equity is involved.) These could be the scenarios.
  1. The fund has done clearly better than the benchmark
    1. Then continue investing more. (It is a bonus if the return is better than C)
  2. The fund has done worse than benchmark
    1. Then stop further investments in the fund
    2. Re-do the analysis of suitable funds and make a different selection
    3. Start investing in the new fund
    4. Based on exit load and capital gains implications, set up the mechanism to shift the existing corpus in the old fund to the new fund
  3. The fund’s performance is better than, but close to, the benchmark
    1. This is a tricky situation and requires careful handling
    2. Re-do the analysis of suitable funds and see if there is a fund that is clearly better than your current fund
    3. If so start investing in the new fund; if not, continue with the current fund
    4. Since the situation is not that clear, you can postpone any shifting decision to the next review date

Summary

  • Compare the mutual fund performance primarily with its benchmark
  • Have a consistent approach to review the performance of your mutual fund investments

Additional Reading

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