- Date : 28/09/2020
- Read: 4 mins
Extreme loyalty to your mutual fund investment will do you no good. You should know when to drop your mutual fund to focus on your financial goals and build your investment portfolio.
Many popular sayings and advice that we are familiar with are not the complete versions. For instance:
- Curiosity killed the cat… but satisfaction brought it back.
- Great minds think alike… though fools seldom differ.
- You should stay invested in a mutual fund for the long haul… unless there’s a need to drop it.
That’s right, while you may have heard people say things like, “Oh, you should just invest in a mutual fund and forget about it for the next 15–20 years,” that’s really not the most prudent thing to do. There are many instances that may require you to sell off your mutual fund. Let's look at some of them.
1. Performance reevaluation
Back when you invested in the mutual fund, you may have done your research well and made a smart decision. However, the performance of your mutual fund investment isn’t going to remain consistent. It’s important for you to keep checking on it. According to financial experts, you should compare the performance of your fund to other funds in the same category. If it has been in the bottom 25% of its category for over a year, it may be time for you to drop it.
2. Fund mismanagement
As a mother or a daughter, you know the role parents play in how their children turn out. The values that they imbibe, the love and care with which they bring them up – all this matters significantly. The same is true when it comes to a mutual fund and the fund manager. The decisions made by the fund manager directly affect the performance of the fund – and thereby, your money. If there is a change in the fund manager and how they are handling the investment, you may wish to withdraw your money. This is also true for other material changes, such as when major shareholders exit.
Related: Important things to consider when investing in a mutual fund
3. Portfolio rebalancing
Getting your investment portfolio right is like cooking a dish, where adding one ingredient can change the whole taste and even texture. Due to changes in the financial markets, some of your mutual fund investments can, over time, grow to become a large chunk of your portfolio, exposing it to a higher level (or a different kind) of risk. If this happens, you may have to sell certain funds and invest that money in other types of funds or investments.
4. Righting a wrong
There may be a possibility that despite your due diligence, you may have chosen the wrong fund or made a mistake (such as over-diversifying). That’s quite normal when you’re starting out and just beginning your investor journey. Once you have greater financial awareness and knowledge, you will be able to spot such mistakes and rectify them by dropping lagging mutual fund investments.
Related: Why should women invest in debt funds?
5. Better utilising of funds
If something better comes along, such as a fund that is performing consistently and exceptionally well, you shouldn’t restrict yourself to the funds you’ve already invested in. You can better utilise your money by withdrawing it from your existing funds to invest in the new ones. Making the best of the financial markets requires you to be aware of what’s going on.
Related: How to invest in stocks like a pro
6. Resetting your financial goals
Your investments reflect your financial goals and where you see yourself in the future. They also reflect your current risk appetite, income, and financial position. It’s possible that, over time, both your financial goals and your current financial position may change. For instance, when it’s time for your children’s college education, you may want to invest in assets that give more assured returns, such as bonds.
It is essential to note that dumping your mutual fund doesn’t have to mean cashing in on your investment and withdrawing it from your portfolio. Once you dump it, you can find other avenues to invest it in and use that money to build your net worth. Active or Passive Investing: What's your choice?
Many popular sayings and advice that we are familiar with are not the complete versions. For instance:
- Curiosity killed the cat… but satisfaction brought it back.
- Great minds think alike… though fools seldom differ.
- You should stay invested in a mutual fund for the long haul… unless there’s a need to drop it.
That’s right, while you may have heard people say things like, “Oh, you should just invest in a mutual fund and forget about it for the next 15–20 years,” that’s really not the most prudent thing to do. There are many instances that may require you to sell off your mutual fund. Let's look at some of them.
1. Performance reevaluation
Back when you invested in the mutual fund, you may have done your research well and made a smart decision. However, the performance of your mutual fund investment isn’t going to remain consistent. It’s important for you to keep checking on it. According to financial experts, you should compare the performance of your fund to other funds in the same category. If it has been in the bottom 25% of its category for over a year, it may be time for you to drop it.
2. Fund mismanagement
As a mother or a daughter, you know the role parents play in how their children turn out. The values that they imbibe, the love and care with which they bring them up – all this matters significantly. The same is true when it comes to a mutual fund and the fund manager. The decisions made by the fund manager directly affect the performance of the fund – and thereby, your money. If there is a change in the fund manager and how they are handling the investment, you may wish to withdraw your money. This is also true for other material changes, such as when major shareholders exit.
Related: Important things to consider when investing in a mutual fund
3. Portfolio rebalancing
Getting your investment portfolio right is like cooking a dish, where adding one ingredient can change the whole taste and even texture. Due to changes in the financial markets, some of your mutual fund investments can, over time, grow to become a large chunk of your portfolio, exposing it to a higher level (or a different kind) of risk. If this happens, you may have to sell certain funds and invest that money in other types of funds or investments.
4. Righting a wrong
There may be a possibility that despite your due diligence, you may have chosen the wrong fund or made a mistake (such as over-diversifying). That’s quite normal when you’re starting out and just beginning your investor journey. Once you have greater financial awareness and knowledge, you will be able to spot such mistakes and rectify them by dropping lagging mutual fund investments.
Related: Why should women invest in debt funds?
5. Better utilising of funds
If something better comes along, such as a fund that is performing consistently and exceptionally well, you shouldn’t restrict yourself to the funds you’ve already invested in. You can better utilise your money by withdrawing it from your existing funds to invest in the new ones. Making the best of the financial markets requires you to be aware of what’s going on.
Related: How to invest in stocks like a pro
6. Resetting your financial goals
Your investments reflect your financial goals and where you see yourself in the future. They also reflect your current risk appetite, income, and financial position. It’s possible that, over time, both your financial goals and your current financial position may change. For instance, when it’s time for your children’s college education, you may want to invest in assets that give more assured returns, such as bonds.
It is essential to note that dumping your mutual fund doesn’t have to mean cashing in on your investment and withdrawing it from your portfolio. Once you dump it, you can find other avenues to invest it in and use that money to build your net worth. Active or Passive Investing: What's your choice?
