Behold, Hold and Fold!

Behold, Hold and Fold!

Many people think that once they invest in a fund, the job of taking care of their investments has been successfully passed on to the fund manager. But this can be a dangerous strategy to adopt. If you think that your work ends when you buy a mutual fund, you are mistaken.You should regularly monitor and review your mutual fund investment. Unlike shares, mutual funds can be reviewed once a quarter.

How do you keep track of your fund's performance? All AMCs provide you with their annual report, a half-yearly report (unaudited results) and a quarterly and monthly factsheet/newsletter. Over and above this, there is public disclosure of the NAV of a scheme on the AMFI website, on the AMC's own website, as well as in the financial dailies. While NAV information tells you very little other than how well your investments are doing, it is basically the portfolio disclosure made through the newsletters and AMC reports that one should be interested in. You can actively monitor your mutual funds to ensure you keep as much of your profit as possible. Your portfolio pulls together all the information you will need to stay on top of your funds and avoid being caught off guard by negative price movements. In addition, try to gauge the fund's performance vis-à-vis its benchmark and its peers (at least to the extent possible). The fund manager will not tell you when to exit the fund. This is something you will have to decide, based on the information available. So, keep track of the fund's performance. After all, it's your money and you should know what the fund is doing with it.

An important point you need to understand is that mutual funds are not synonymous with stocks. So, a decline in the stock market does not necessarily mean that it is time to sell the fund. Stocks are single entities with rates of return associated with what the market will bear. Mutual funds are not singular entities; they are portfolios of financial instruments, such as stocks and bonds, chosen by a portfolio or fund manager in accordance with the fund's strategy. Relying only on market timing to sell your fund may be a useless strategy since a fund's portfolio may represent different kinds of markets. Besides, mutual funds are geared toward long-term returns. A rate of return that is lower than anticipated during the first year is not necessarily a sign to sell.

But holding onto a persistently losing fund is the most crucial mistake many mutual-fund investors make. For whatever reason—they become emotionally attached to the fund, they tell themselves the fund is bound to turn around or that they are long-term investors and just need to stick it out—they sit back and watch these losing funds drain money out of their portfolios. But you do not have to suffer the same fate. For most investors, especially those with equity exposure and long term perspectives, buy-and-hold is the easiest strategy and one that has proven effective on a historical basis. What buy-and-hold really means is staying the course through short-term market dips. However, there is a time when selling a fund is not so bad an idea. Remember mutual funds are bought to be held, to hold for a lifetime, if possible. But you obviously do not want to marry your mutual fund, as things may change even if you are a long-term investor. There are times to admit a mistake and go on with your life.

Do keep in mind that even if your fund is geared to yielding long-term rates of returns, that does not mean you have to hold onto the fund through thick and thin. The purpose of a mutual fund is to increase your investment over time, not to demonstrate your loyalty to a particular sector or group of assets or a specific fund manager. The key to successful mutual fund investing is knowing when to hold them and knowing when to fold them.

I shall discuss some situations that are not necessarily indications that you should fold, but situations that should raise a red flag, in the subsequent blogs.