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.
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
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
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
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.
Dollar Cost Averaging
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
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 carry a Zacks Mutual Fund Rank
#5 and have performed very poorly over the last three 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
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 carries a Zacks Rank #5 and has returned a negative 34.51%
over the last three 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 carries a Zacks Rank #5 and has returned a negative 26.25%
over the last three 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 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. (Read:
Russia Mutual Funds to Watch on Ukraine Crisis
The fund carries a Zacks Rank #5 and has returned a negative 14.47%
over the last three years.The fund has an expense ratio of 2.01%.
View All Zacks #1 Ranked Mutual Funds
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