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It’s unlikely that you will hold on to your mutual fund investments forever. You will need to sell them from time to time. However, one should note that it is important to sell an investment for a good reason. Furthermore, the reason should stem from your own investment philosophy and your investment-selection criteria. Here we discuss some scenarios when selling an investment is justified.

When the fundamentals of a mutual fund scheme change

Any change in a mutual fund’s fundamental attributes can be a good reason for selling it. For instance, you should consider selling a fund if the changes are significant, and the reasons you bought the investment may no longer hold. Which means, if the objective of the scheme, after the change, does not any more match your investment objective, you should consider exiting the scheme.

For instance, you buy a small-cap fund because you want exposure to small cap stocks. If the manager starts buying large cap stocks, you may have a problem. You may now have more than one large cap fund in your portfolio, and no small cap fund. At that time you may need to sell to restore your original balance of styles.

You made a mistake

Closely related to changing fundamentals are misunderstood fundamentals. If you buy a shirt that doesn’t fit, you return it. Sometimes investments need to be returned, too.
Let’s take an example. Suppose a sector fund loses more than 40% in a year since the sector it tracks hits a rough patch. Investors who failed to understand the investment proposition offered by a sector fund and believed they were investing in a ‘lowrisk’ investment avenue, should sell since they made a mistake.

Rather than hanging on to a mistake in the hope it stays above water, it makes sense to switch the money to a more compelling investment, one you feel comfortable with. The best way to avoid such situations, of course, is to be a finicky buyer. You should research your investments thoroughly before investing.

Your portfolio needs rebalancing

Let’s say you had a balanced portfolio at the end of 2002, with equal holdings in large- and mid-cap funds. By the end of 2007, your portfolio wouldn’t have been even remotely as balanced. This is because mid-cap funds outperformed large-cap funds by a significant margin over that time frame.

P r u d e n c e d e m a n d s spreading risks around, and that includes rebalancing a lopsided portfolio. For safety’s sake, it pays to periodically check to see if your portfolio is diversified, with a good mix not only among styles, but among asset classes and sectors too. That often means selling some winners and investing the proceeds in others that aren’t faring quite as well.

The investment doesn’t live up to expectations

While one year of underperformance may be nothing to worry about, two or three years of falling behind can get frustrating.

Worse, if you’re relying on the investment to offer a particular amount of return each year, on an average, and it continually falls short, it may jeopardize your chances of meeting your financial goals. However, before pulling the sell trigger, be sure you're comparing your underperforming mutual fund scheme to an appropriate benchmark index and its industry peers.

Your investment goals change

We don’t invest to win some imaginary race, but to meet our financial goals. As your goals change, your investments should change as well. Suppose you start investing in a balanced fund with the goal of buying a car within the next five years.

However, if you are promoted in your workplace and are allotted a company car, you may decide to use that money for retirement instead. In that case, you might sell the balanced fund and buy a diversified equity fund. Your goal and the time until you draw on your investment have changed. So the investment should, too.

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