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ET Wealth Wisdom Ep 46 (ET Online)

The art of selling your mutual fund investments right

04:04 Min | November 29, 2019, 2:14 PM IST
Buying into investments is easy. What investors find difficult to understand is when and what to sell. In this episode of Wealth Wisdom, find out when is the right time to sell your mutual fund investments and what should guide this decision.
Hosts: Tania Jaleel, Shambhavi Mehrotra
Producer: Abhinav Tripathi

You have been doing this for like a decade now right?

Doing what?

Been in the business of simplifying personal finance for the likes of us…

Awww is that what we are calling it these days? Well, yes… what seems to be the problem?

Well… what is the correct answer to this: When is the right time to sell your mutual fund investments?

Very good question indeed, but I'm going to give you some homework before I go on to explain the answer to this. Why don't you go back in time a little and tune in to episode 39 of wealth wisdom? That podcast will tell you what you need to figure out before you sell your mutual fund.

Hi everyone, I am SM and I am TJ, in this week's ET Wealth Wisdom we will give you the answer to when you should sell your mutual fund

Ok, now before we get to the answer… what are the usual reasons given by investors?

Well in a recent column, CEO of Value Research, Dhirendra Kumar, lists out 3 reasons given by hyperactive investors. One, they've made profits; two, they've made losses and three, they've made neither profits nor losses.

And none of these are the right answers. Here is why

Kumar writes that by themselves, they are not legitimate reasons for selling a mutual fund. The first comes from the spurious 'booking profits' concept promoted by advisers. Booking profits doesn't make sense for stocks, and it makes even less sense for funds. This attitude makes investors sell their winners and hang on to losers.

In mutual funds, the whole point is that there is a fund manager who is deciding for you which stocks to sell and which to buy. If the fund manager is doing this job well, then the fund is giving good returns. Therefore, selling a fund that gives good returns is the reverse of what investors should be doing, writes Kumar.

Now the second reason. Sure, getting rid of poor performers is a legitimate idea, but you need to evaluate the timeframe and the degree of underperformance, explains Kumar. He says that many investors try to sell funds that have performed well but may have underperformed other funds by small margins.

Then there are those investors who do this: their fund generated 25% in a year, but then there are five other funds that have generated 30%, so they will switch to those.

This is what Kumar has to say about such investors: This switching based on short-term past performance is counter-productive and does nothing to improve future returns. Only if a fund underperforms consistently for two or more years should you switch.

So, what is the answer then? When should you sell your MF?

Dhirendra Kumar says that you should sell a fund and get your money out when you need it.

Oh, is it?

He explains this with an example: Let's say you have invested for five or 10 or 15 years, continued your SIPs, and now the money has grown to what you need. You need to make a down payment for a house, or pay for your child's education, or whatever else. If you're getting close to that time, you should sell and redeem, irrespective of the state of the market.

And on that note, here is a thought nugget from Dhirendra Kumar to leave you with: The goal of investing is not to invest, but to sell, to get the money you have earned. That should take at least as much attention as the first part does.

That will be all from us for this week. Come back next week for more personal finance wisdom. Do check out our official Facebook, Twitter and Instagram pages

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