| The media has no trouble telling you what | | | | same category (asset class). If your utility |
| funds to buy and when, but finding advice on | | | | fund was down 2% and you found out that the |
| when to cut a fund loose is much harder to | | | | average utility fund was down 4%, then this |
| come by. | | | | is not a good enough reason to sell it. It |
| | | | helps to compare your fund to its peers by |
| Sometimes parting with a mutual fund can be a | | | | looking at the 1-year, 3-year, and 5-year |
| difficult task. Other times it can be quite | | | | performance. If it has underperformed the |
| easy. More often than not, investors tend to | | | | average of its peers in all cases, then you |
| sell their mutual fund holdings for the wrong | | | | have good reason to sell your fund. |
| reasons. So before you make a hasty decision, | | | | |
| please read the following list of the correct | | | | The Fund Manager Has Changed A simple change |
| reasons to sell a mutual fund investment: You | | | | of fund managers, in itself, is not enough |
| Need the Money Sometimes there will be | | | | reason to sell a fund on a short-term basis. |
| circumstances in your life when you must sell | | | | If it is a passively managed fund (index |
| your investments. It is important for you to | | | | fund), then you have little to no reason to |
| weigh out alternatives to selling your | | | | worry. If it is an actively managed fund, |
| investments because it could really hurt you | | | | then you should keep on eye on the new |
| in the long term (see "The Power of | | | | manager. Give the new manager a few years |
| Compounding Interest"). | | | | before you decide to cut them off. Believe it |
| | | | or not, there are plenty of quality fund |
| You may be able to get a loan or borrow the | | | | managers to replace your manager no matter |
| money. If you can get a rate lower than your | | | | how good he or she was. |
| expected returns on your investment, it might | | | | |
| be best to hold off on selling your | | | | The Fund Size Has Changed Sometimes size does |
| investments. | | | | matter! One great example is a small cap |
| | | | fund. A small cap fund manager may be great |
| Your Situation Has Changed If you are at a | | | | at picking small company stocks and their |
| different stage in your life, you may want to | | | | success can often lead to their failure. Here |
| consider selling your fund. As you near | | | | is an example: Fund Manager Joe is great at |
| retirement, you may want to consider more | | | | picking a portfolio of 30 small company |
| conservative funds. If you get married, you | | | | stocks. |
| may need to compromise your risk tolerance | | | | |
| and desired returns with that of your spouse. | | | | His success brings a lot of attention to his |
| | | | fund in the media, resulting in a large |
| The Fund Has Changed Its Style or Objective | | | | increase in assets in his fund. |
| It is important to consider your original | | | | |
| reason for buying a fund. If you bought a | | | | The problem is that he now has such a large |
| small cap fund to help diversify your | | | | amount of money to dump into these small |
| portfolio, but you notice that it is | | | | stocks that he may end up owning 10% of a |
| investing in large blue-chip companies, then | | | | particular stock, which leads to liquidity |
| you should consider selling that fund. | | | | problems (because his fund becomes a major |
| | | | shareholder of the stock). To get around this |
| The Fund is Underperforming This reason for | | | | problem, he has to hold more stocks. It was |
| selling, although valid in certain | | | | tough enough for him to pick 30 quality |
| conditions, is where most investors make a | | | | companies, but now he is forced to find 50 or |
| mistake. When calculating performance don't | | | | 60. |
| look at too short of a period and don't | | | | |
| compare apples to oranges. | | | | The Fund's Expense Ratio Rises A small rise |
| | | | in an expense ratio is not a big deal, but |
| It is important to base your decision on | | | | when you see a significant rise you may want |
| relative performance not absolute | | | | to consider selling the fund. In the case of |
| performance. When your fund is down 5% while | | | | bond funds or money market funds, it is |
| other funds or the market in general are up | | | | highly unlikely that the fund can increase |
| 10%, it is very tempting to switch over to | | | | its returns enough to justify an increase in |
| what is "hot." This is called "Chasing | | | | the fund's expenses. |
| Performance" and is the best way to shoot | | | | |
| yourself in the foot. | | | | Remember, these expenses only subtract from |
| | | | your returns. |
| When studying relative performance, you look | | | | |
| at your fund and compare it to its peers. If | | | | If you were considering selling your fund and |
| your fund is a utility fund, you should not | | | | the primary reason for selling it was not on |
| be comparing it to the S&P 500. When choosing | | | | the list, you may want to reconsider. |
| a benchmark, you must select funds in the | | | | |