Investments come with subsequent risks. Knowing when to buy and when to sell a mutual fund can help investors make the right choice with their funds. Needless to say, the whole idea of investing in a mutual fund is to dissipate risk.
External factors may coerce you into selling mutual funds. For some investors, there is a change in personal viewpoint and for some, there is a change in the fund they are investing in.
For others, it is the market environment which decides whether they should sell a mutual fund or not.
Let’s look at the different aspects of selling a mutual fund to identify when it is best to sell.
In this article
- The Fund Perspective
- Change in the Fund Strategy
- When the Investment Style Changes
- When the Fund Size Increases Enormously
- From the Viewpoint Investment
- Things to Consider When You Sell a Mutual Fund
- +Exit Load
The Fund Perspective
A lot of research goes into buying a mutual fund. An investor usually aligns his investment goals to the fund that he invests in.
When the objectives of the fund changes, then the investor may not be able to get the same value from it or achieve his objectives through the investment.
Change in the Fund Strategy
If you strategized your funds to your financial goal, it is important that you consistently keep a check. The fund’s strategy should be aligned with yours.
If you notice that the fund manager has changed the investment objective and is investing in financial instruments which are not in line with your financial goals, then it is time for you to reconsider investing in the funds
Mutual funds usually notify investors if they make changes in their investment strategy. If you observe that the weightage in a certain area is increasing more than your risk appetite, then it is better to sell the fund.
There are two primary factors that you must be aware of:
- A mutual fund must continue to offer diversified investments in different financial instruments, according to your financial goals.
- It should provide clarity when significant changes in the strategy are taking place.
If you notice any change in either of these factors, you must look carefully at your mutual fund investment to see if there is a trend that you do not like. Sell the fund if you are not happy with the investments it is currently making.
Some funds may change their names over a period of time to market the fund in a new way or to attract new customers. Sometimes, when the name changes, the fund’s strategies may also change. Keep an eye out for such changes.
What if the Fund Underperforms Consistently?
This will not be easily identifiable. Sometimes, mutual funds are just experiencing short periods of low performance, which is covered up over a long period of good performance.
Funds that track an index or mimic a benchmark will usually see a change in their performance if there is a change in the indices they are following. But actively managed funds which depend on a fund manager’s judgment regarding investments may underperform even when other funds of the same type are doing well.
If your fund has performed to your satisfaction over a substantial period of time and if you notice a sudden period of low performance, then chances are that it will gain pace once again and make up for its performance.
When a fund underperforms consistently with no sign of improvement, it is time you liquidate these holdings and invest in a fund that is performing better.
When the Investment Style Changes
This is based on the fund manager. Sometimes, you will notice a change in the investment style which may lead to lower returns.The star rating or ranking of the fund may fall after a fund manager exits.
Be watchful of such changes. When it comes to actively managed funds, the fund manager plays the most important role.
Sometimes, it is good for investors to see a change in the fund manager because the new manager may be able to allocate their funds in a better manner.
But in other cases, when a prudent fund manager leaves and a new one seems to invest in a style that the investor is not comfortable with, then it can spell trouble for your funds.
Sell your mutual funds when the fund manager changes but make sure that the change has a detrimental effect on your investments. Passively managed funds may not suffer from such a problem.
When the Fund Size Increases Enormously
Many popular funds grow rapidly because they are picked by investors. When these funds grow to a huge size, it can be difficult for the fund managers to allocate it effectively to the desired financial instruments.
This is usually a problem for funds that are focused on investing in small or mid-size companies. If a fund begins to invest huge amounts in such companies, it is usually seen that the share prices of such companies quickly increase the cost of the shares.
From the Viewpoint Investment
While changes in the fund strategy and the fund manager play an important role in deciding whether to sell the funds or not; your own investment viewpoint can be of great importance as well.
Some investors may change their viewpoint over a period of time and may make the transition from high-risk investments to low-risk ones.
Hence, depending on your viewpoint, you may consider selling mutual funds in the following scenarios:
+When Your Goal Has Been Achieved
People invest to achieve a certain goal. If your goal is achieved, you need not invest further. For example, some pick a fund investment for their child’s education or retirement.
The funds can be sold when the objective of your investment is accomplished.This is the usual investment perspective of most investors and it is an apt reason to sell the mutual fund.
+If You Want to Re-Balance Your Portfolio
Your asset allocation may have misbalanced over a period of time. Once a year, it is a good practice to check the funds you have invested in.
You must find out about the ones that need to go away and those that need to be added in order to maintain a portfolio of your choice.
+If You Need a Tax Break
Funds that end with a substantial amount of capital loss can be sold to offset capital gains for the rest of the investment.
By redeeming the mutual funds, the investor will be able to apply the capital loss to the capital gain and enjoy a tax break.
+When Emergency Strikes
Emergencies are uncertain Mutual fund investments can be a savior at times of emergency. Let’s say you are undergoing a period of financial disparity.
Open-ended funds will allow you to withdraw anytime and can be very helpful. Selling a mutual fund at the time of emergency, may have nothing to do with the current market conditions.
+The Market Landscape
- Timing the market for mutual funds may not be necessary. Unlike shares, mutual funds aim at providing the investor with a certain amount of benefit and mitigate risk through diversification.But sometimes, the market landscape can play a vital role when it comes to selling certain funds.For example: Gold funds can be subject to change in the markets.
Demonetization (November 2016) had brought a sudden change in gold prices which also affected the ETFs. Following the market every second is not important in mutual funds. But the investor must be aware of the market conditions to make wise investments.
Markets Overvalued (or Undervalued)
Market forecasts can cause a sudden hype or plummet mutual funds. Think of the market in the late 90’s, when the internet giants ruled and everyone chose to invest in them.
There was then a time when real estate investments were everything an investor could think of. Even gold saw a sudden rise in price, which increased its investment value.
This is what the market might consider a passing craze. The industry or that company may rule the stocks for a period of time.
+When Your Investment Preferences Have Changed
Let’s say you have invested in large-cap funds. You have got good but not amazing returns and now, you wish to invest in a fund which will provide you with a higher percentage of returns.
If you don’t wish to dip your hand in every pot, you can first sell your existing investments and then cadre to your new investment preferences. However, you must be sure of your investment and consult a professional whenever you want to make such financial decisions.
Things to Consider When You Sell a Mutual Fund
Unless you are selling because of an emergency, it is important to keep the following things in mind when you decide to sell a mutual fund.
- Some mutual fund schemes charge an exit load. This load can make a difference in the total amount of money that you get at the time of redemption.The exit load is deducted from your investment. A lot of funds keep a higher exit load for early redeemers.
Check more on exit loads here: Is there any penalty on selling Mutual Funds?
+Tax on Profits
- If the value of the funds is greater when redeeming (compared to the original cost), you will be subject to capital gain tax, if the funds are held in a taxable account.Check this post to know more about taxes on mutual funds: Tax on Mutual Funds.
If you have invested in mutual funds, keep the following things in mind. The answer is not always to continue your investments even when it stops giving adequate returns.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.