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When do you fire a mutual fund?

Special to The Globe and Mail

Disappointed with the mutual funds you hold? It's not an uncommon sentiment in an era of low (or negative) returns, continued market volatility and enticing low-fee investment alternatives.

But should you fire your mutual fund? In coming up with the answers, reflect on your reasons for investing in the fund in the first place, consider what's happening with it now and tailor your expectations and moves to your investment goals and strategies.

"Do I hold or do I fold?" asks Serge Pépin, the head of investments for BMO Investments Inc., adding that the question and the exercise is as pertinent for individual investors as for someone like him overseeing a series of funds and managers. "At some point in time you may need to pull the plug."

Working with a financial planner, it's important to take time to understand everything from why you were attracted to the fund to where its performance is today, Mr. Pépin says.

"There's so many factors that can make a fund work well in a certain environment - or not," he says, and that principle applies to a wide variety of different funds you may hold. "There's a lot of homework to do."

Sadiq Adatia, chief investment officer for Sun Life Global Investments, says the psychology of sticking with a mutual fund means broadly looking at its performance over the long term.

"In an environment where everything is down, you can't expect your mutual fund to go up," he says. "You have to have the full context behind it."

If things seem to be truly going south, see whether there may have been a change in the fund manager, the composition of the management team or the organization and resources behind it.

"You have to make sure that you're comfortable with the change that's happening," Mr. Adatia says.

People are often drawn to a fund or a manager with impressive gains, but that may be an example of an "outlier" and of course is in the past, Mr. Adatia adds.

Transparency and communications from the company are important; does it provide good customer service, answering questions directly, without marketing jargon?

"If you don't feel confident in the answers you're getting, maybe it's time to fold," Mr. Pépin says.

© 2007 The Globe and Mail. All rights reserved.

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