When to sell mutual fund?

Sell a mutual fund

When to sell a mutual fund?

Once you have invested in a fund only half of the work is over. You have to stay with the fund until your goal is achieved. However, there are many circumstances in which you may have to exit from a fund. In this article, we discuss the reasons for which you should sell a mutual fund.

  • Achievement of desired goal:

Most of the times we invest in a mutual fund to achieve a financial goal, for example saving 7 lakh rupees for down payment of new house in next 5 years. Let us assume that you have invested in a large cap fund to achieve this goal and the corpus in your fund reaches the desired amount in just 4 years. Since your goal is still a year away and you have reached the desired amount, hence you should withdraw the corpus from the equity fund and put it in a safer option like an ultra short term fund or liquid fund.

  • Consistent Underperformance:

Once you have invested in a fund for long term, it is always prudent to give it a time of 2 to 3 years before reviewing its performance. However, when you review the performance of a fund and you find out that it has been consistently underperforming the benchmark and category average, then it is time to exit the fund and invest in a better one.

It is important to note that one should not be perturbed by short term fluctuations and always look past 3-5 years performance when reviewing a fund. If you have a long term horizon then never sell a fund for the reason that market is going down as the market works a cycles and it is important to stay the course to benefit from these market cycles.

  • Change in fund manager:

In mutual funds, Fund Managers have kind of star status and a change in fund manager is a big news too most of the times. However, a good fund house will always have processes in place so that a change in fund manager does not affect the fund performance. Still, it is prudent to monitor the fund performance once a fund manager is changed but it would also be wise to give the new manager a chance to prove himself. Each fund manager has his/her own style and in case the new style causes the fund’s performance starts to falter and continues to do so, then you should exit the fund.

  • Rebalancing Portfolio:

Asset allocation plays a very important role in a portfolio. However, with time a rebalancing of the portfolio is required. Rebalancing may be needed because of different growth rates of each asset class, i.e. debt and equity. You should look into the asset allocation of your portfolio every 1 or 2 years and rebalance the same. This rebalancing might need you to sell funds of one asset class and buy the funds of the other asset class.

  • Change in fund style or mandate:

If a fund moves away from its mandate or changes its investment style then you should review the same and if it doesn’t suit your investment goals or portfolio, then it is the time to exit that fund. For example, a mid cap fund upon increase in its AUM (Assets Under Management) might convert itself into a large cap fund. Sometimes, a merger may happen of two funds and hence there is change in the style of investment of your fund. Consider such cases and evaluate if you should exit from the fund.

  • Change in Personal Circumstances:

If there is a change in your personal circumstances, for example, with age the risk taking capacity of a person decreases and the allocation in safer instruments has to be increased.  It is suggested to shift from the funds that are more concentrated on equities and invest more in debt funds because as they are less risky and returns are more or less assured unlike equity funds.

  • Right Now : If it is a Regular fund

Since Jan 2013, SEBI has ensured that every mutual fund have a direct fund option in which the investor does not have to pay any commission thereby increasing the returns by 1%-1.5%. In case you have invested in a fund before January 2013, then you must switch to its Direct variant now (note: The investment in Direct fund will be considered a fresh investment and Exit load and Taxation will apply accordingly). Also, in case you bought a regular fund post 2013, then also you can switch to direct fund but do consider below mentioned points:

Exit load – Mutual funds charge exit load; it is a fee charged to the investor on redemption of units from the fund. Most of the equity funds charge exit load if you redeem before completion of 1 year. However, this period differs for few funds; hence it is better to check it before redeeming the fund.

Taxation – Short term and long term capital gain tax is charged when you redeem from a fund. You may check the taxation of mutual funds here.

The decision of selling the mutual fund shouldn’t be impetuous. It must be well thought of considering all pros and cons before selling mutual fund units. You must also consider the charges and taxes when you think of selling a fund. After considering all the factors mentioned above you can take a decision whether to sell a mutual fund or not.

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