Don't use gut or tips to sell mutual funds

In one of my articles, I had talked about a ‘trading’ strategy and why it is important to follow a ‘process’ out there. I would like to extend my thought to the ‘forever’ portfolio or the long- term portfolio. I understand that I am probably talking in to a vacuum because investors do not seem to like anything for keeps. (hopefully, except spouses and children).

Franklin Templeton India did a study. Two of their funds, have 3.9 lakh investors and these schemes have been around since 1993. Franklin “Prima” has a NAV of around Rs 838. These units were available at par in 1993 in the NFO/IPO. One would think that there are many investors who stayed the course. Unfortunately, less than 10,000 investors have stayed on since inception in these two funds. And reports say that it is people who could have died or forgotten. So much for our mindset.

We get mood swings. Most mutual funds gathered the most number of investors in the market peaks of 1999-2000, 2008-09 and recent times. Most people get out of the mutual funds when there are sharp falls or prolonged stagnation. Thus, very few get the ‘long term’ returns from these funds and end up with lower returns. Yes, there will be hindsight analyses of people who sold at the top, bought at the bottom and so on and got super returns. However, the thing to note is, how many of us are capable of finding out the tops and bottoms?

I can understand if someone panics and gets out of a single direct share he holds. But I fail to understand why a mutual fund investor should bother about the markets? Yes, you may like to increase your outlay if you think everyone is pessimistic and not do so when everyone is in love with equities. Once you understand that when everyone is happy and piles money into the markets, the markets become expensive and ‘prospective’ returns become lower. Similarly, when no one talks equities, it is probably a good thing to add some.

Apart from selling a ‘single’ stock for some reasons, I would not sell or stop my SIP in mutual funds of the equity flavour. Selling is something I will do only if I need the money desperately for an emergency. I will not use this simply to buy in to another asset class. For instance, I will not bank of my mutual funds at the last minute, to buy a house. For buying a house, I will plan well. Ideally, I will shift some money out of equity mutual funds to debt funds when there is a very positive sentiment and exuberant valuations in the stock markets. We want to get the maximum possible returns. So, it needs planning to sell.

Do not sell out or stop investing simply because of fear. Yes, you may sell out of a company share because you fear the company will simply vanish or go under. But this is not true for a diversified mutual fund. So, why panic in a mutual fund?

Selling is probably a more important aspect of investment than buying. A good company can have a bad year. Our markets can have more than one bad year. We will go through market cycles. Markets are never ‘fairly’ valued. It is always a function of optimism and pessimism. Use pessimism to buy and optimism to sell. How do you know what is what? How do we distinguish? Is there anything other than ‘anecdotal’ evidence or homilies such as ‘even my driver is making money in stocks’?

One broad market indicator is something called the ‘market’ PE (price to equity). It is like treating the companies in the respective indices as a single company and expressing their P/E.

In the Indian context, the Sensex has an ‘average’ price to equity or around 18. In the 2000 boom, it went to nearly 30 times.

The lowest was around 12 times, after the 2008 crash. Currently, our Sensex is trading at a P/E of around 23.  Thus, it means that the closer to 12 it is I like to buy and the closer to 30 I should be happy to sell. This is a very rough yardstick. There are other functions like prevailing interest rates, growth in the economy and profitability of companies.

In general, try and use some measure for a stock or a market before you take a call on buying or selling. Have a reason other than your gut and your tipster. Hear the sounds, check some numbers. You will be surprised at the amount of analytical data floating around for free. Take some time to learn. It will help you with your wealth creation.

The writer is an independent analyst. He can be contacted at balakrishnanr@gmail.com