When Should You Sell a Mutual Fund?

Mutual funds are diversified instruments. They are preferred by investors who want to invest in a basket of securities to reduce the risk of investing in them individually. While a lot has been written about the right time to buy and/or sell shares, when it comes to mutual funds, the factors affecting the sale of units can be diverse. In this article, we will try to cover various scenarios when is the best time to sell mutual funds.

Changes in the fund

When you buy a mutual fund, you go through the fund’s objectives, asset allocation, and risk exposure to choose the one that suits your financial goals. While most mutual fund investors prefer to invest and forget, not many know that the fund house can change a fund’s investment objectives at any time. When a fund house does that, it needs to give investors an option to exit the scheme without paying an exit load. If the fund you have invested in changes and if it does not sync with your investment plan, then you can consider exiting it.

While the exit load is waived, you will need to think about the tax implications post-redemption.

Change in the fund manager

The fund manager plays a pivotal role in the performance of an actively-managed mutual fund. When the fund manager changes the investors must start tracking the performance of the fund closely. While some changes can result in an improvement in the fund’s performance, there can be times when this change has a detrimental effect on the fund.

If you are not comfortable with the approach taken by the new fund manager or observe any negative effects on the fund, then it might be the best time to redeem mutual funds.

Consistent underperformance of the fund

This is applicable to actively-managed funds. Funds that are managed passively like Index funds tend to see a change in performance if the underlying index they are tracking experiences a change. However, in the case of actively-managed funds, the fund manager plays a crucial role in their performance.

There are various factors that you need to consider before making a decision about selling the mutual fund due to underperformance:

  • Mutual funds will respond to changes in the overall market. If your fund has suddenly started underperforming, then you can analyze its performance to look for reasons for the drop in performance. If other similar schemes have also experienced a drop in performance, then you can decide if you want to wait until the markets recover or exit the scheme. Your mutual fund selling time may be in sync with industry status.
  • Sometimes, the fund manager might make an error resulting in a temporary drop in the performance of the fund. If the scheme has performed well across market conditions, then you might want to give the fund manager a chance to make up for the error.

size of the fund

If a fund offers good growth potential and has managed to deliver consistent returns across different market cycles, then it will attract more investors. However, this also means that the fund size will increase and the fund manager will have to ensure that the increased corpus is allocated optimally to ensure the desired returns. This can sometimes be difficult.

Also, if the fund invests in small-to-medium companies, then a sudden increase in investments can cause the stock prices of the companies to rise. While this can result in an increase in the NAV of the fund, the effects can be short-term resulting in a drop in value in the near future.

Consult your advisor before deciding if the size of your mutual fund needs to be considered before making a decision.

Fulfillment of financial goals

Usually, investors buy mutual funds to meet their financial goals. Such investors tend to redeem their investment once the financial goal is achieved.

For example, you might invest in a mutual fund to create a corpus for buying a house. Once your corpus is ready, you might want to sell the fund.

Portfolio rebalancing

Many investors try to create a balanced portfolio to keep risks in check without compromising on the potential returns. While they create one, the balance of the portfolio can get skewed over time. Hence, prudent investors revisit their portfolios regularly. If you are one such investor and realize that certain funds are not contributing to the balance of your portfolio, then you can consider replacing them with newer funds.

Tax Benefits

If you suffer from a capital loss, then the Income Tax authorities allow you to offset it against capital gains. Some investors choose to redeem mutual funds that have a capital loss to enjoy tax benefits on the redemption of funds that offer capital gains. This is not a recommendation that you should do this but just an observation that many investors take this route. It is important to note that this needs to be calculated carefully and you must go through all the terms and conditions specified by the IT authorities before making this decision.


One of the benefits of investing in a mutual fund is that your investments are liquid. This means that you can redeem them if you are faced with any emergency. In such situations, you don’t need to think about when to sell mutual funds, but leverage the liquidity and redeem your investment. However do keep in mind that some funds may take up to 2 working days to return your money in your bank account.

Market conditions

While this is not a highly recommended strategy, it can help make additional returns if you are a market-savvy investor. There are times when certain macroeconomic conditions impact the overall markets. It is important to understand that trying to time the markets can be a risky strategy and must be employed with due caution.

Change in your investment preferences

Investing is a lifelong journey. While you had certain preferences and goals in your twenties, by the time you hit your thirties, these preferences can change. For example, you might be looking at higher returns in your twenties and be willing to take higher risks. But, in your thirties, you might be satisfied with lower returns provided the risks are low too. Hence, you might consider redeeming the high-risk mutual funds purchased in your twenties and replacing them with medium-risk ones. Please consult your advisor before deciding when to sell mutual funds in India.