Short-Term Mistake

I have a number of funds in my portfolio. However, when I reviewed them recently, there are a few which just seem to be bad performers. They are JM Basic, JM Financial Services Sector, Taurus Discovery and L&T Small Cap, all of which I picked up in 2007.
How does one make the decision to keep holding a fund because it may turn around or just sell it? Should I redeem or hold? Is there any possibility of these funds being taken over by some other fund house in the near future? I really would appreciate your advice on the best course of action.
- K Modi

It's clear that you have made a few glaring, but very common, errors where your investments are concerned.

The first is that you selected three of the funds based solely on their short-term performance. You picked a narrow time frame where the performance impressed and you impulsively bought the fund hoping that it would replicate the numbers in the future. A fund may experience short-term euphoric bursts; that does not make it a good investment. Long-term consistency is of more value. Had you looked at the long-term track record, you probably would not have made the purchase.

Secondly, you failed to consider the narrow investment mandate and how it would fit in with your overall portfolio. At Value Research, we constantly advise investors to steer clear of sector and thematic funds unless there a compelling story or a conviction at the investor's end. If that be the case, then investments to such funds must be restricted to just 20 per cent of the equity portfolio.

Thirdly, you invested at one go and did not opt for a systematic investment plan (SIP). In doing so, you invested at the market peak and turned out to be a victim of market timing. We unapologetically stress again and again; the best way to invest in equity funds is via an SIP.

In the case of L&T Small Cap, you purchased the units of that fund during its new fund offer (NFO) period. Again, we caution investors against buy into new funds unless it is a brand new theme or idea. There are plenty of funds in the market which have proven track records and fund manager credentials from which you can make your pick.

Had you done your homework at the time of investing, you would not have found yourself in a position where you are stuck with four funds and have no idea what to do about them.

Just as we advise investors to do their homework when buying a fund, we would suggest the same course of action when deciding to sell. The biggest error you can make is to be impulsive and act in haste.

Never sell a fund just because its short-term performance has not been good. For instance, look at the performance of HDFC Top 200. In 2006 and 2007 it was a very average performer when compared to all its peers. After that, it has shown superior performance. Franklin India Bluechip put up a disappointing performance in 2007 but has impressed after that. To take a call on performance, one must have an adequate time frame and make the comparison with the peer group.

You should do that in the case of the four funds you have invested in. If the long-term performance numbers fail to make a case to stay invested, then exit. Make your decision based on the numbers, not in hope. Don't agonise forever or wait in earnest for a change in fund manager or asset management company (AMC). If you find the numbers disappointing, cut your losses. Move on.

Also ask yourself if you still believe in the theme of the fund and how the fund fits in with your overall portfolio. In the case of JM Financial Services Sector, the fund was merged with JM Equity Fund this very month.

Investments are solely for the purpose of making your money productive. If that is not being done, then sell.

4 Rules To Follow
• Never get carried away by short-term bursts in performance numbers. The fund could have well taken large risks to deliver that return or simply got lucky with a few of its bets.
• Don't let brief periods of underperformance push you to make impulsive sell decisions.
• Unless you have a strong thesis on why a sector or thematic fund must be in your portfolio, avoid such investments. If you already have invested in such funds but find them cluttering your portfolio, consider exiting.
• Do not get emotionally attached to any investment. Be coldly rational - if it is not working for you, dump it.