Knowing when to sell a fund is vital. There’s lots of focus on the best funds to buy, but little is often said about when to sell. Investing may be a long-term game, but it’s important to revisit your investments and make a sell decision sometimes.
Like with shares, there can be a temptation just to hold onto an investment in the hope things will just get better. However, for various reason, it is time to cut your losses or take the profits. Here we explain some of the scenarios.
Consistent Bad Performance
An easy one. If a fund is performing badly, it may be time to have a closer look at it. Sustained poor performance raises serious questions. It’s important to check how long the fund has been poorly performing – is it just subject to a general downturn in the market or are there more structural problems?
For example, a UK Equity Fund you invested in may be on a downward trajectory for over a year whilst others in the sector have shown strong gains. This may indicate the key holdings of the fund are not being selected as wisely as other funds in the sector. So it may be time to look elsewhere.
Re-balancing your Portfolio
You may have set-out with a strategy of having 50 percent invested in Equity Funds and 50 percent in Bond Funds to ensure diversification. However, let’s just say your Equity Funds investment has surpassed expectations which means the value of your portfolio is now skewed 80 percent in Equity Funds and 20 percent in Bond Funds.
Therefore, you may look to re-balance your portfolio by selling units of your Equity Funds to try and gain the original 50 / 50 balance.
A Significant Change has Happened
One of the most significant changes to a fund is that the Fund Manager may leave and with that there may be a change in investment style. However there is usually a fairly lengthy succession period and things may not change too much at all.
An adjoining concept to a change in Fund Manager is that there may be a change in investment style (either by the current or new Fund Manager). For example, the fund may have had a tendency to buy a particular set of shares without chopping and changing too much – if you notice that there tends to be more diversity in the shares the fund holds and more trades, it could be time to move on.
The Size of the Fund
An increase in the size of the fund is an indication to the popularity that investors have in it. But this doesn’t always equate to success. It means that the Fund Manager has even more power and could become complacent.
Likewise, you may hear about the concept of a fold holding ‘unlisted’ or ‘illiquid’ assets – this simply means assets that can’t be transferred to cash easily. If a fund has a large proportion of these types of assets (such as investments in private companies), it presents a risk for you that these assets may be hard to sell and you will find it harder to get your money back should the worst happen.
It Just isn’t Giving what you Wanted
Let’s suppose you bought an Equity Income Fund with a particular yield in mind of 5%. However, it is not achieving this criteria. Or perhaps the wider market has changed – fewer companies are paying dividends. You may decide it’s time to sell-up and look at alternatives such as Bond Funds.
Many Reasons to Sell
There are many reasons to sell a fund; if it is performing too well, it may be time to cash in and re-balance your portfolio (sell high, buy low). If it is performing badly consistently, then it would suggest it’s time to sell.
Often investors get caught up in a dud in the hope it will just improve over time or don’t want to admit defeat. This is why it is important to dig deeper and understand the mechanics behind the fall – is it short-term or long-term?
And there is one final reason you may look to sell a fund…because it has met the needs you laid out originally such as helping to buy a new home.