When to Sell Mutual Fund

When to Sell Mutual Fund?

A Lot of Mutual Fund Investors actually don’t know when is the right time to sell a mutual fund. It is actually really difficult to time the market & it can be tough to make a sell decision for the investors. So Let us discuss when you should sell a mutual fund.

1) Investment Goal is Achieved

The best time to sell a mutual fund is when your goal for investing in the mutual fund is achieved. All of your mutual fund investment must be linked to achieving certain financial goals such as Retirement, Child’s Education, Family Vacation etc.

After Investing in Mutual Funds once the goal the achieved you should sell the mutual fund and cash out. If your expected time period of achieving the goal is 15 years and you reached your goal in 13 years then you should not wait for the next 2 years and sell your funds immediately.

Markets are volatile and risky in the short term and you can lose your gains if the market falls in the near term and you don’t sell your mutual funds. Similarly on the contrary, if you expected the goals to be achieved in 15 Years and the end of the term you are still falling short, you should be invested and not redeem the funds immediately after the end of the term.

All of your sell decisions should be linked to the goals & you should only sell your investments if your goals are achieved and not due to any other factor such as market volatility, market news etc.

2) Fundamentals of Mutual Funds have Changed

Another strong reason to sell a mutual fund should when fundamentals of mutual funds have changed.

Fundamentals of Mutual Funds are Fund Manager, Mutual Fund Type, Investment Objective, Mutual Fund Class etc. Whenever there is a fundamental change in the mutual fund and they do not align with the investment objective that you had when you first invested in the fund you should sell your mutual fund.

Ex 1) Whenever there is a change in fund manager of a fund this is a fundamental change and you should observe the new fund manager for a say 3 – 6 Months and check how the fund is performing under him, Whether there is a lot of deviation from before, Whether the returns have suddenly increased/decreased, Whether the fund manager invests as per fund investment objective.

If you feel unsatisfied with the new fund manager you should think of selling your funds. Also, make sure not to make sell decisions just because the fund manager has changed you should give new fund manager adequate time to prove himself.

Ex 2) Whenever there is a change in mutual fund type or mutual fund class, you should check whether the new fund aligns with your investment goal. SEBI in May 2018 asked mutual funds to recategorize their mutual funds, at that time a lot of funds were required to reclassify their mutual funds and fundamental of mutual funds were changed. If the new mutual funds were not as per your investment strategy you should sell your investments.

3) Your Mutual Fund is underperforming

The final reason for selling a mutual fund is when your fund is underperforming its category and benchmark for a certain period of time.

Markets go through ups & downs so do mutual funds but it is important that the mutual fund at least should not underperform its benchmark and its category for not more than 2 years. Mutual Funds are market-linked products and their returns are dependent on market returns. Whenever the market has a bull run the fund is expected to get more returns than the benchmark and whenever the market has a bear run where it is giving negative returns the fund is expected not to fall as much as its benchmark.

Mutual Funds can underperform in the short term but in the long term it should always outperform the markets If it is unable to outperform the index for some period you should consider selling mutual funds and look for similar funds in the category with better returns.

You Should give your fund a time of at least 4 – 6 Quarter to check and prove its returns potential. If the fund is still underperforming you should sell your mutual funds.

You can check returns of mutual funds and compare it with their category and benchmark on websites such as Money Control and Value Research.

Also Read – How to Measure Risk in Mutual Funds.

Hope you are able to understand when to sell a mutual fund, If you have any questions do let us know in the Comments Section Below & Thank You very much for reading.

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