When should you sell your mutual fund investments?

  • Akshatha Sajumon
  • 12 Jan
  • 7 minutes

Mutual funds have become a prime candidate for investments for every class of investors. They have a huge variety of products under the mutual fund umbrella that suit all types of investors whether they are aggressive or cautious. However, one of the most crucial decisions in mutual fund investments is exiting the fund at the right time. The timing of this decision will determine whether the investment has resulted in profit or loss.

Factors influencing decision to sell mutual fund investments

It is a fact that there is no exact formula to generate profits on mutual fund investments but the decision to sell the fund is based on many factors. Some of such factors are discussed below. 

1. When the investor has achieved the investment objective

One of the main reasons to invest is to achieve a set goal. Some examples of such goals can be setting up a fund for the education of children, meeting wedding expenses, setting a fund for emergencies, retirement fund, etc. When these objectives are met, the investor may sell the mutual fund to generate funds that will help in meeting the objectives.   

2. Consistent underperformance of the fund

Reviewing the performance of the fund at regular intervals is quite essential. It will help in weeding out funds that no longer provide adequate returns to meet the cost of investing or are eventually draining the overall returns of the investor.

Hence, one of the strongest reasons to redeem the fund is when the fund is consistently underperforming. If the fund is consistently underperforming there may be certain fundamental errors in the asset allocation of the fund, the fund principles, etc. Therefore, exiting an underperforming fund at the right time is as essential as entering the right fund at the right time. 

3. To meet any emergency financial needs

Investments can be a safety net at the time of any emergency (for example, a medical emergency). Redeeming the mutual fund at such time is irrespective of the current market trend or market conditions. Investors can use the amount received from the fund redeemed for meeting their emergencies. 

4. Sudden change in the investment strategy by the fund manager

The fund manager is considered to be the driver or the captain of the fund. The performance of the fund is heavily reliant on the efficiency and the expertise of the fund manager. If there is a sudden change in the fund manager’s investment style or a change in the fund manager altogether (with different investment strategies which may not be in correlation with the investor’s objectives), this may lead to a decision to exit the fund. The investor may attribute the consistent low returns to such reasons and may prefer to exit the fund than be part of an unsatisfactory investment.

5. Having a better mutual fund alternative

There are multiple investment options for investors when it comes to mutual funds. Be it equity funds, debt funds, or any other fund class, there is always a better investment option that may provide better results; or a fund having a lower risk or expense ratio but more or less the same level of results. It is natural for the investors to move to such funds and redeem their existing mutual fund investments. 

6. To set off against capital gains

Tax benefits are one of the many reasons for investments in mutual funds. Investors get a tax deduction of up to Rs. 1,50,000 under section 80C in case of investment in ELSS funds. This may be a contributing factor for redeeming existing funds and investing in such funds. 

Besides the tax deduction, the Income Tax Act also provides for a set of capital losses on account of mutual fund redemption against capital gains of other mutual fund investments. This provides a good opportunity for tax savings and an incentive to redeem loss-making funds.

7. To follow a market trend

Mutual funds, broadly speaking, are not that reliant on market trends as they have the inherent benefit of diversification to safeguard against any loss-making individual asset. However, in the case of certain mutual funds (like thematic funds), if they are in a cyclical trend, the investors may choose to redeem the funds at a particularly high point and re-enter the fund at the right time. 

8. Re-adjustment of portfolio based on various constraints

Various factors influence the investment portfolio of an investor and they may decide to rebalance the same on a timely basis. These decisions impact the selection or redeeming of the mutual fund. Some of such factors or constraints can be budget constraints, risk appetite, investment horizon, investment goals. 

When there is a shift in any of these factors, it may become grounds for redeeming a mutual fund. For example, if the risk factor of a mutual fund increases then the fund may become less attractive to the investor and will be redeemed. If the budget of the investor gets reduced due to other responsibilities or other financial priorities, the investor may choose to redeem their mutual fund investments. 

Conclusion

Mutual funds have the potential to maximize the investor’s wealth at a good pace. But it is also a double-edged sword. If the investor does not know when to exit the fund at the right time it will not only fail to meet their investment expectation but may also end up draining their capital investment.

Hence, selling mutual funds at an appropriate time is as crucial as investing in good funds to maintain a healthy portfolio. However, investors should be careful to not be short-sighted with quality mutual funds just with the aim of getting short-term gains or redeem a fund to meet a luxury instead of priority needs.

FAQs

1. Is there an expense on redeeming a mutual fund?
A. Yes. Many mutual funds charge an exit load (especially if the units are redeemed within a year of investment) as a tool to discourage early withdrawals from the fund. This exit load is usually expressed as a percentage of the NAV of the fund.

2. Is it a good idea to sell mutual fund investments simply because the fund manager is changed?
A. Fund manager plays a crucial role in the performance of a fund. However, a change in the fund manager cannot be the sole reason to exit from the fund. If this change is corresponding to factors like decreased returns or increased risks, then the investor may choose to redeem the fund.

3. Is it advisable to shift to a new mutual fund solely based on current high returns?
A. While investment in mutual funds is solely to earn better returns, investing in a new fund solely on current high returns is not always profitable. The investor also has to take into consideration other factors like the risk of the fund, past performance, fund type, asset allocation of the fund, expense ratio, fund manager details, investment objectives of the investor, etc. 

4. Does taxation on mutual funds influence the redemption decision of the investor?
A. Yes. Tax implication can be a huge contributing factor in the redemption decision of the investor. Mutual funds are subject to capital gains tax which is dependent on the period of holding. Investors are benefited from reduced tax liability on long-term funds (equity funds or dent funds) which may influence their redemption decision.

5. What is the minimum lock-in period in the case of ELSS funds?
A. The minimum lock-in period in the case of ELSS funds is 3 years. Investors cannot redeem their investment during such a lock-in period. 

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Akshatha Sajumon