Buying can be easy, selling takes a lot of effort. The reluctance to sell is the bane of most investors. Most investors link their decision to sell with gains or losses. They hold on to well-performing schemes because they are doing well; at the same time don’t sell the losers because they offer little value. An investor largely looks to sell only when he needs cash.

It's a situation every mutual fund investor has faced at one point or another. However, selling stocks or mutual funds is as important as buying them. Just holding on to funds can make an investor lose out on the opportunity to maximise portfolio returns.

For a portfolio to be managed effectively investors should sell periodically even if they don’t plan to get out of the market. The decision to sell is a complex one, and the criteria for making that decision is different for virtually every investor. However, broadly, there are four instances when investors should consider exiting from a scheme.

A fund may underperformance due to a number of factors, not all of which point equally toward a decision to sell. The first thing that has to be kept in mind is that past performance is not an indication of the future nor does it guarantee future success. Yet, past performance is one of the most useful guides investors have, as it reflects a fund’s portfolio management skills, for better or for worse.

To evaluate how a fund has done, its performance should be looked at only in relation to others in its category. If a scheme consistently performs below its peers over the same period one should consider having a relook at that investment.

You should check to see how the whole sector in question is doing, and how your fund is performing compared to other funds in that sector. If your fund finishes in the bottom 25 per cent for performance in that group, a red flag should go up. However, try to find out why its performance has suffered it could be one stock's bad performance which affects the entire fund's returns.

If a scheme is consistently underperforming its peers by a significant margin, find out why. If it stems from an understandable strategy, it might make sense to stay invested. But if the fund manager or the portfolio cannot provide a reasonable explanation, cut losses. Staying invested in an underperforming scheme involves an opportunity cost. You can well get out of that scheme and look at one that has been improving its performance.

One reason that a funds performance may suffer is that its investment style has gone out of fashion. The market tends to go through cycles of varying style preferences—momentum, value, blue-chip, and so on—and managers who follow very narrow investment philosophies are likely to be in the wrong place at least some of the time.

Hence a scheme’s performance is closely linked to the investment style followed by its fund manager. A fund manager may change the investment style depending on the scenario existing. But what you as an investors has to see is whether the new investment style fit in with your asset allocation plan. For example, during the bull run in the markets many balanced schemes tilted in favour of equity. This tilt in equities increased the risk profile of these schemes–and made them an ‘unbalanced’ option for investors seeking an equal exposure to debt and equity. As such, investors who are serious about asset allocation should stick to schemes that are committed to a particular asset class. Or else it may be time to look elsewhere.

Sometimes it may be advisable to sell some loss making investments to avail of tax benefits. Long-term capital gains can be set off against long-term capital losses. So if you have a capital gain of Rs 2000 on account of part sale of you holding and at the same time are carrying book losses of Rs 20,000. You could kill two birds with one stone -- reduce capital gains tax liability to zero and rationalise the portfolio.

The decision to sell a fund is rarely easy and set, but if you evaluate the causes of underperformance and tax implications closely, you'll have a better idea of whether to dump or not.