When Is the Right Time to Sell Your Mutual Fund?
The biggest temptation to an investor is to sell their stocks or Mutual Funds when they are not performing as per their expectation or when the market is low.
However, like all worldly temptations, even this one has a list of drawbacks.
While it may seem enticing to take out your mutual fund investment amount and reinvest it elsewhere in the hope of greater returns, the redemption is not always pro investor.
In this article we will be looking into the instances where liquidation of your Mutual Funds is optimal.
But before we proceed with those instances, let us clarify one of the biggest misconceptions that investors have which makes them sell the Mutual Fund before they have extracted their true value – assuming that Mutual Funds operate like stocks.
While it is a common practice to sell the stocks when the market is up, the same rule of buy low sell high doesn’t apply in case of Mutual Funds redemption.As the Mutual Funds belong to the diverse portfolio category instead of single entity like stocks, it is unwise to sell the fund depending on the market timing.
Now that the clarification has been made, here are some instances where redeeming your Mutual Funds amount makes greater sense.
When should you redeem Your Mutual Fund Investments?
- Your Fund Manager Changes
When you make Mutual Fund investments, you are not just betting on the asset but also relying your trust on the fund manager’s experience. But, if the fund manager changes and the reason for manager change indicated in the prospectus is unclear or causes a red flag, you should think about taking your investment elsewhere.
- Your Fund’s Strategy Changes
When you invest in Mutual Funds, more often than not you make the investment with the aim of fulfillment of some financial goal. Now, at times it so happens that the fund you invested in, example a small-cap fund, would start investing in some large-cap or mid-cap stocks – a transition that comes with attached risks. So when this happens, it is always better to gauge how in sync your financial goals are with the goal of the fund and if any discrepancy is found, you should take your money elsewhere.
- Constant Underperformance
While the meaning of underperformance varies from one investor to another, take this as your ballpark – If the funds are not performing up to the mark for the tenure between 6 months to a year, hold on and gauge the fluctuation. But if the fund has been underperforming for 2 or more than 2 years now, let go of it.
- Your Portfolio Needs Rebalancing
In case you have any fixed asset allocation model that you need to maintain, you might need to opt for rebalancing all your Mutual Fund investment holdings at the end of a year so as to bring the portfolio back to its original state.
- You Need to Up your Capital Gains Number
There are instances where a Mutual Fund suffers great capital losses which the investor needs for a tax break to offset the realized gains from your other form of investments. In a case like this, it is always better to redeem the mutual funds so as to apply capital losses to the capital gains.
- You have Met Your Financial Goals
This last reason behind redeeming your Mutual Fund amount is a no-brainer. Since you started investing in Mutual Funds to fulfill a goal which could have been anything – buying a car, a house, planning children’s education, it is only wise to stop investing when you have achieved your target.
While these were just six reasons or red flags which should make you rethink your options and maybe redeem the funds, there can be a number of others as well. But in the end of the day, selling Mutual Funds is a decision that is never to be taken lightly.
Until and unless you have clear reasons and factual backing saying that your chosen schemes won’t perform again, hold on to them.