The responsibility of efficiently managing a fund remains on the shoulders of a fund manager, but keeping a close watch on the performance of the funds is the investor's responsibility.
The responsibility of efficiently managing a fund remains on the shoulders of a fund manager, but keeping a close watch on the performance of the funds is the investor’s responsibility. Understanding the right opportunity to sell a mutual fund will either get the investor a handsome return or stop losing further.
Times of volatility require more proactive portfolio management and the buy-and-forget strategy doesn’t work. Investors do need to keep a watch if the mutual fund is glued to its strategy and providing significant gains. Here are some factors to consider:
Obviously investments are made for potential returns. If a fund is underperforming, investors may be tempted to offload the funds from portfolio. However, a fund is not a short-term instrument. So, negative performance in a short span should not be a trigger to sell the mutual fund.
That in turn means a fund must start performing at least in the mid-term. We will take three years to be the threshold. Negative performance over three years is clearly an indication of the inefficiency of the fund and is a trigger point to sell the mutual fund.
Failure to provide fund investing benefits
Among others, mutual funds provide advantages of diversification and dollar-cost averaging.
Money from individuals, and even organizations, are invested in stocks, bonds, or other assets covering diverse industries globally. It allows a small investor to invest in a basket of securities at one go. Investors need not worry about investing a large chunk in securities separately. Moreover, these are less risky than any individual asset class as underperformance of a security gets mitigated by outperformance of others in the portfolio.
A mutual fund by itself is a hedge. Since it contains a diverse range of securities, it protects against losses made during a bearish market. An important fact to remember in this case is that such protection is lowered when one invests in sector-specific fund. However, the excess risk undertaken is rewarded by similar rate of return.
Therefore, if a mutual fund underperforms the overall market in a period, which includes both a downturn and an upswing, then it is definitely time to exit.
This is a strategy which involves purchasing a fixed amount of a security, fund shares in case of mutual funds, regardless of the prevailing price. Ultimately, shares are bought both at higher and lower prices over a period of time. This results in a lower average cost per share.
Therefore, such a strategy reduces the risk of allocating a large sum of money into a single fund. In certain cases, known as dividend reinvestment plans, investors plough back dividends received from the fund in return for additional number of shares.
The idea is to further reduce the risk involved in investing compared to a one-time investment in a mutual fund. So if you have been following such a strategy over an extended period of time and still making losses, it is definitely time to pull out.
An investor may opt for a particular fund based on the strategy employed. Mutual funds thus need to be actively managed by fund managers to stick to the strategy. A change in the fund’s strategy may be one that does not match with investors’ financial goals. Often, change in fund manager leads to the change in strategy.
So, investors need to keep track of the developments regarding fund manager and fund strategy. There must be a re-evaluation and possibilities of the new strategy sounding less promising may be a reason to sell the mutual fund. However, an investor may want to hold it for some period to check if the new strategy is earnings gains.
3 funds to sell now
Let’s take a look here at 3 mutual funds that we would have preferred to sell. All these funds have performed very poorly over the last 3 years. Also, they carry Load (a charge levied on initial purchases of shares used to pay a commission to the selling broker) and have high expense ratio.
Rydex Inverse Russell 2000 2x Strategy A (RYIUX) seeks to return results (minus fees and expenses) that is equivalent to 200% of inverse daily performance of Russell 2000 Index. The fund’s strategy involves short selling securities and investing in derivative instruments. The fund invests a lion’s share in financial instruments whose performance characteristic is opposite to the equities in the underlying index.
The fund has returned a negative 34.51% over the last 3 years. The fund has an expense ratio of 1.94%.
DWS Gold & Precious Metals A (SGDAX) seeks maximum return by investing a lion’s share of its assets in companies involved gold, silver, platinum, or other precious metals activities. The fund invests in both domestic and foreign companies including the ones in emerging economies.
The fund has returned a negative 26.25% over the last 3 years. The fund has an expense ratio of 1.18%.
ING Russia A (LETRX) invests primarily in equities of Russian companies. A minimum of 80% of its assets are invested in Russian companies, while the remaining 20% goes into debt securities that are issued either by Russian firms or the Russian government. Thus, this fund has a huge exposure to Russia, which is currently facing number of sanctions owing to the Russia-West geopolitical tension.
The fund has returned a negative 14.47% over the last 3 years. The fund has an expense ratio of 2.01%.
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