The simple fact about investing in mutual funds is that it does take a bit of work, time and energy to do it right. It’s also imperative that you monitor your holdings no matter if you own actively managed funds or index funds. Sometimes it’s possible that your fund may bring back disappointing returns but you still want to hold onto it but, if are fund is doing one of the 4 things below, you probably should consider selling it.
Your fund is experiencing a high level of redemptions.
Generally speaking, mutual fund managers do their best to stay fully invested within their specific investment mandate. If a fund is experiencing an increased level of redemptions the fund manager will be forced to keep more cash on hand in order to meet those redemptions. When this is the case this cash is thus not being invested in the stocks, bonds or any of the other vehicles that the specific fund tends to focus on, meaning it might be time to get rid of it.
Your fund is seeing a significant inflow of dollars.
Generally speaking, money follow success. It’s almost inevitable that the hot fund from last year will attract investors who are hoping to cash in and, if this is the case, it may mean that there is too much new cash flow in two short a timeframe. The problem that this causes for a fund manager is that they won’t be able to find good investment ideas that are within their investment style. In terms of an index fund this isn’t a significant problem but for a fund investing in smaller mid-cap stocks it can be. Any fund that is truly concerned about their shareholders will close any new investments before this becomes an issue. If they don’t, it’s probably time to get that fund out of your portfolio.
Your fund is seeing a big change in personnel.
One of the most significant events for and actively managed fund is a managerial change. It leaves a lot of questions including who will be in charge as the fund goes forward, will their investment style continue in a similar vein and will there be a change to the funds indexing methodology. Another issue that could arise is when your fund company has personnel problems. What can happen is that new management at the top will signal changes that inevitably filter down to the fund level. If that’s happening, it may be time to get rid of that fund.
Your fund is changing their investment style.
If you see that your fund is moving from being a small-cap fund to and “all-cap go-anywhere fund” there will also be accompanying changes in the type of risk that the fund has, meaning that it might no longer fit into your portfolio. These changes might also cause an overlap with some of your other holdings and increase your risk even higher. If that’s the case, it may be time for you to dump this particular fund.
Your fund is merging with other funds.
In some cases a fund company will be allowed to merge one fund into other mutual funds within the same family. This usually happens when a fund is underperforming or not growing as much in assets as the parent fund company would like. Of course there are rules about restating past results for the “surviving” fund but, if this is happening to a fund that you own or took place recently with one that you are considering purchasing, it would behoove you to dig a bit deeper and find out details about the holdings and performance of the surviving fund to make sure that if it’s into your portfolio and make sense for your investment style.
Mutual fund investing, simply put, is not just about sending in your money to the fund and then forgetting about it. Anyone who wants to be a successful mutual fund investor must monitor their holdings on a regular basis and, when needed, make changes to them. Results are a key of course but they certainly aren’t the only metric by which your fund (or funds, should be judged).
If you have any questions about mutual funds or questions about personal finance in general, please let us know and we’ll be sure to get back to you ASAP with advice and answers.