Mutual fund sell puzzle – Know when to do and when not to

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One must go through the reviews, existing and historical performance of a mutual fund before investing in the financial instrument. You should be a long-term investor to actually reap the benefits of mutual fund. With short-term objective, you are not likely to go anywhere.

After investing in mutual funds for a certain period of time, you must be looking to sell it. But, do you know the right time to sell or when not to sell the mutual fund? If you do not have the answers for such questions, then you can take this post as a guide and make wise decisions with respect to mutual fund investment and sale.

When do people normally sell mutual fund?

  • Investors normally look to sell mutual funds that start to under perform
  • Investors look to maximise profits by selling mutual funds that start delivering exceptional performances
  • Sometimes the stagnancy in the fund performance compels investors to sell the mutual fund and invest the proceeds in other investment forms.

From the points stated above, it is observed that investors pay heeds to the performance factor only when they look to sell the mutual fund. But it may not prove fruitful if you sell the mutual fund purely on performance only as there are other factors also that you must consider. First, know when you can think of selling the mutual fund.

When is the right time to sell mutual fund?

(1) Change in fundamentals of mutual fund scheme-You can look to sell mutual fund when the fundamentals of the mutual fund scheme, which you have bought, have undergone significant changes. If the reasons or the investment objective for which you purchased mutual fund will no longer sustain, then you could think of offloading your investment from the said instrument. For example-You may have bought a small-cap fund as you would be interested to expose your investment to small cap stocks only. But, if the fund manager starts purchasing large cap stocks, you could have a problem and start looking to sell in order to go with your style of investment.

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(2)  When portfolio requires to be rebalanced-Now, if you have a balanced portfolio with equal measure of investment in mid-cap and large-cap funds. Five years down the line, it may happen that the portfolio would not have been balanced due to the estimation that mid-cap funds could outperform the large-cap counterparts significantly during the period. So, the logical move would be to spread the investments around and that could well require the rebalancing of the portfolio. You must keep an eye on investing around different assest classes and sectors to minimise the risk element. As part of this, you could sell some good performing funds and invest the sum thereof in certain funds that are not performing well.

(3) Shifting to other investment modules-It is a fact that one does not like to invest all his/her money in mutual fund alone. You could have the desire to make investments in other instruments as your existing portfolio may not be diversified enough. Other reason could be the stable and regular returns you would like to have. This can be achieved by using the Systematic Withdrawal Plan, a scheme by which you can start redeeming your funds with the portion of yet to be redeemed amount will continue to offer returns. You can look to invest in tax-free bonds and fixed deposits that offer a regular flow of returns.

Avoid selling mutual fund under these circumstances

(1) Don’t look at stock performance to sell your mutual fund-It is good to keep a close eye on the stock market happenings but make sure you do not get too influenced by it. People often commit the mistake of selling their mutual funds when the markets start to fall due to anticipation of massive losses. But, selling mutual fund based on the performance of stock market can get you deprived from the benefits that may come otherwise. The reason being most mutual funds are not actually linked to stock markets. Mutual funds include debt, sectoral investments, stocks that are not the part of stock market indices, as well as fixed income securities or bonds that reduce the direct impact of market volatility on mutual funds. Do not sell the mutual fund in a haste as you could miss out on earning big in the future. You should see the exact impact of market volatility on mutual fund before deciding to sell or not to sell.

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(2) Avoid taking call on short-term performance-Do not buy mutual fund with a short-term vision as you could not make much gains out of that. Make a long-term investment goal and have realistic expectations regarding the mutual fund performance. Ensure you stay invested in mutual fund for a period of say 10-20 years to reap the real benefits of mutual funds, which offer higher returns in long-term. Selling mutual fund on a spell of bad performance in a short period does not make much sense as the instrument has a lot to offer if held for a long period of time.