Know six reasons to sell your mutual fund

Generally investors invest in mutual funds according to their investment goals, time-horizon and risk-taking abilities. There are various types of funds for different types of investors. However, the investors are always in doubt to determine when to sell a mutual fund. In this article, the author discusses six reasons to sell a mutual fund. Read to know.

All of us know that mutual funds collect money from many investors, create a pool and then invest money according to stated objective. Some mutual funds invest in equities, some mutual funds invest in bonds and some of them invest in both equities and bonds. Investment experts advise common investors to invest according to their individual risk profile and time-horizon. The experts also advise to have a mutual fund for each financial goal to be achieved in future. Many articles have been written on different types of mutual funds, their nature of investment and how and in which funds a common investor should invest, but generally we do not find many articles which advise us when to sell our mutual fund. In this article, we are going to discuss when an investor should sell a mutual fund held by him/her.

Please remember mutual funds are not stocks

So far as individual equity is concerned, there are various concepts/theories on purchasing, holding and selling. Generally, when a particular stock goes below a limit informally determined by an investor, it is sold. However, mutual fund is not like stock. A mutual fund manager invests in various stocks and in different bonds. If one or two stocks held by a particular mutual fund go down abruptly, there is nothing to worry. It can be stated without any doubt that the fund manager would take appropriate action in this regard. If a stock held by a particular mutual fund scheme abruptly starts going down, then the fund manager will quit it or will purchase more of the stock, based upon the assessment on that particular stock. The investor who is investing in that particular mutual fund scheme should not bother much. The value of a particular stock going down does not have very significant impact on a mutual fund scheme.

#1: When to sell a fund: when investment objective changes

When an investor starts investing in a mutual fund, he/she goes through the investment-related document very carefully and starts purchasing units of that fund based upon its investment objective. So, when a fund abruptly changes its investment objective, it may not be suitable for a particular investor for the future investment. In such a case, the investor may consider coming out of the fund by selling the units.

#2: Investor achieves the goal

In the first para of the article, it was mentioned that the experts advise the common investor to invest in a fund according to a future goal. If the goal is achieved, the investor should come out of the fund. In another way, let us suppose that a investor seeks creation of wealth at the rate of 15 per cent per annum for 10 years. So, after ten years he should re-check the particular fund and if his/her target is achieved, he/she should come out of the fund.

# 3: Scheme is under-performing

This is a very tricky issue. Firstly an investor must have to determine the definition under-performance according to his /her own opinion. If the fund is consistently under-performing (i.e., it gives less return than the average return in that particular category) for a period of more than one year or so, he/she should come out of the fund.

# 4: Change of fund manager

This is another tricky point. If the AMC changes the fund manager and appoints a new manager whose credential is in doubt, then the investor may consider selling the mutual fund. But the investment experts advise to exercise caution in this regard, because even if fund manager gets changed and the investment objective does not change, then it may not be prudent for an investor to sell the fund which he/she has been holding for a long time.

# 5: When portfolio needs re-balancing

Generally the experts advise to reduce equity contribution when the age of the investor crosses fifty. Furthermore, it may be possible that the investor has almost reached his/her goal. In such cases investor may decide to rebalance his/her portfolio. In such a situation, the investor may consider selling a particular mutual fund.c

# 6: In case of financial emergency

If the investor suddenly faces financial emergencies and needs cash immediately, there is no other alternative except selling mutual funds which he/she is holding. However, such situation is rare.

Concluding comments

From the above discussion, it is to be understood that mutual funds, unlike equities, should not be sold frequently. It is quite beneficial to hold mutual funds (equity, debt or hybrid) for a considerable period of time for more benefit.

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Author: Umesh12 Jul 2017 Member Level: Platinum   Points : 3

Quite an informative and contains useful tips for mutual fund investors. In a fluctuating market it is really tricky to pinpoint the selling time of mutual fund units. In my opinion, whenever the market is substantially higher, the MF holder can take advantage by selling part of his holdings if not full a part of it, and buy them or other better scrips later when there is a sudden dip in the market or market has been in stagnation phase for quite a long time.

It is easy to say then practice but these things work sometimes in favour of the investor and he is rewarded by good returns. For example, when the BJP Govt came in power in the center the market rose from 22000-23000 level of BSE index to 27000-28000 but remained there stagnant for a period of about 3 years and it is only recent developments of UP election results, demonetization and GST implementation that the market is again moving up.

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