Mutual funds, especially equity-oriented ones, are meant for long-term investing. However, there may be times when an investor may need to exit a mutual fund before they initially planned to. This could be because of a change in personal priorities, fund underperformance, and other considerations.
Therefore, knowing when to sell your mutual fund is as important as knowing when to buy one. In the absence of this understanding, investors may hold on to a mutual fund investment longer than required or sell too early and miss out on potential returns.
Several factors need to be considered when determining whether to sell your mutual fund investment. This article will take you through different scenarios to help you understand when you may consider exiting your mutual fund investment.
Scenarios when you should consider selling a mutual fund
Here are some situations when you may need to consider exiting your mutual fund investment:
Fundamental changes
If there are some significant changes in the scheme, you may think of selling your mutual fund. These changes can be:
- A shift in the fund's objective or investment style.
- Changes in the types of assets it invests in.
- A major adjustment in the risk level.
So, let’s assume that you invested in a hybrid fund and it suddenly starts investing more in equity/stocks than your risk tolerance permits. In such an event, you may consider reassessing your investment.
Change in the fund manager
When you invest in a mutual fund, you place your trust in the expertise and experience of the fund manager to potentially grow your money in a way that helps you achieve your investment goal. However, if you notice in your quarterly or yearly report that the fund has a new manager, it's important to take note.
A new manager may have a different investment style that may or may not suit your investment purpose. So, if you notice a change in fund manager, monitor your fund performance closely. In case you see a change in performance or strategy that you are not comfortable with, you may want to examine whether or not to stay invested.
Read Also: What is the growth option in mutual funds?
Consistent underperformance of the fund
Short-term underperformance of a mutual fund is not necessarily a cause of concern, but long-term underperformance may be. If you notice that the fund has been consistently underperforming compared to its benchmark or other funds in the category, it may be time to reconsider it.
Compare your fund’s performance over 1, 3 and 5 years. You can also compare your fund with other funds in the same category.
Portfolio rebalancing
Maintaining a balanced investment portfolio is important for managing risk and achieving long-term returns. Over time, some assets in your portfolio might grow faster than others, causing an imbalance. For example, if your mutual fund investments in equity grow significantly, your overall portfolio risk might increase.
In such cases, rebalancing your portfolio by selling some mutual fund units and reallocating your money to relatively stable debt instruments can help maintain the target asset allocation. Portfolio rebalancing ensures that you stick to your investment strategy and risk tolerance.
Fulfilment of financial goals
A positive reason to sell your mutual fund units is when you have achieved your investment goals. If the purpose of your investment was to save for the purchase of a house, fund a wedding or provide for a child’s education, and you have ultimately achieved your goal, it makes sense to sell your mutual fund investment.
As you near your goal, you may also consider moving to a lower risk fund for 1 or 2 years, to mitigate the impact of sudden market volatility on your corpus. However, make sure you plan this carefully to minimise tax consequences and align with your liquidity needs.
Emergencies
We all know that life is unpredictable. Emergencies such as medical expenses, job loss or other financial crises may force you to sell some of your mutual fund investments. It’s wise to have an emergency fund in place to avoid selling investments at a bad time. However, if you have no other option, selling a mutual fund to cover urgent needs is understandable. In emergencies, try to sell investments that have the least impact on your long-term goals.
Market conditions
Sometimes, broader market conditions may signal it’s time to sell a mutual fund. For example, the economic environment may change dramatically — for example, rising interest rates may affect debt funds or if the sectors your fund invests in are expected to face sustained headwinds. However, reacting emotionally to short-term market volatility is not recommended. Make decisions based on long-term trends and solid research. Consulting with a certified financial advisor at this stage may be advisable.
Change in your investment preferences
Your circumstances and preferences may change over time. You may become more conservative as you approach retirement. Your risk tolerance might decrease. When your investment needs or style change, it may be suitable to review your mutual fund holdings. If they no longer fit your updated strategy, selling them may be prudent.
Read Also: Rounding-off in Mutual Funds: Meaning and Importance
Conclusion
Strategic investing is not just about fund selection but also about making well-considered moves throughout the investment journey. Whether it's due to a change in the fund's management, consistent underperformance or changing goals, staying alert and reviewing your investments regularly can help enhance your investing experience.
FAQs:
How long should I hold mutual funds?
The holding period depends upon the fund type and your goals. Equity mutual funds usually benefit from a longer holding period of five-seven years or more. However, as discussed in this article, there may be situations where you need to exit an investment prematurely. This decision should be backed with sound reasoning, careful consideration and adequate research.
Can a mutual fund’s value fall to zero?
Although it is extremely rare, a mutual fund can theoretically lose all its value if all the securities it holds become worthless. However, diversified mutual funds invest in multiple assets, which reduces this risk significantly.
Is it safe to keep money in mutual funds?
No mutual fund is safe. However, mutual funds seek to mitigate risk through diversification, professional management, and adopting a buy-and-hold strategy. They are managed by professionals and regulated by authorities. However, like any investment, they do carry some level of risk, and it is important to choose funds that match your risk tolerance and financial goals.
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