Disposing investments is as essential as acquiring assets. Usually, investor plan to purchase assets, but forget to assign equal importance to understand the sale process. Quite often, investments are sold for the wrong reasons or at an inopportune time. Selling assets for reasons like having earned good returns, or not having earned returns, or having incurred losses are all amateur. Therefore it is crucial to know when to sell a mutual fund.
Investment in the mutual fund is a long-term game, and it is not advisable to continually watch the performance. But you should not forget the investment once done. You must conduct at least an annual review of the portfolio performance to meet the investment objectives, and achieve the financial targets.
Exit investments if they are floundering to ensure overall portfolio performance and constitution are as per your desire. Always measure a fund’s performance vs its benchmark and not against your expectations or market in general. However, underperformance is only one aspect, and there are several facets to decide when to sell a mutual fund.
Change in fundamentals of a scheme
Investment in mutual fund is based on its investment strategy. Change in fund’s investment objectives, will lead to a different risk and return profile. For example, a mid-cap fund may get converted to a multi-cap fund and starts to invest in small-cap companies. If you either already hold a small-cap fund or do not want to get exposed to riskier small-cap shares, you must exit the mutual fund.
Sell a mutual fund to rebalance your portfolio
Any change in the value of the investments will lead to a change in the portfolio’s composition. For instance, if mid-cap funds have significantly increased in value over the past one or two years, their proportion would be higher in the portfolio value. Next logical step would be to sell a portion of the mid-cap fund and invest in another category, like a large-cap or a debt fund.
Also, the future expectation of returns may require a shift in investment configuration. If you believe that mid-cap stocks have had their run in the above example, you would want to exit those and spread the investment into another category of funds. Or suppose you believe the logistics sector will underperform and the pharmaceuticals sector will perform better. You should sell logistics sector fund and invest in pharma sector funds.
Achieved your investment goal
Selling your mutual fund investment is the logical action once you have achieved your investment goal. For instance, if you had set up a systematic investment plan to fund your daughter’s college costs, you have to dispose of the fund to pay the college fees. However, this is only applicable for goal-based investing.
Other reasons to consider selling a mutual fund
Though not the most prominent, there are a few other reasons that may lead you to a sale decision.
- Sell to take advantage of exceptional fund performance in recent times. Exit should be strategic, i.e. for a reason, or if you know of circumstances that will lead to depleted future performance
- Change in fund ownership or change in fund manager
- Significant overlap in fund holdings – this is to ensure that investments are diversified
- Liquidity requirements – there can be unavoidable circumstances that may push you to sell your investments and meet immediate liquidity needs
- Substantial growth in fund size – in rare circumstances, specific funds can grow so significantly in size that mobilizing its assets can become a challenge. Sectoral funds, thematic funds or small-cap funds may encounter these challenges wherein investment options are either limited, already overvalued or less liquid. In such cases, it is better to sell the funds
- Tax break – though seldom, but you may choose to sell loss-making investments and incur a capital loss to offset against the capital gains from the sale of other parts of your investment
Read about diversification through mutual funds here at – Diversify mutual fund investment portfolio
Irrespective of the reason to sell, be mindful of the below factors:
- Exit loads – some mutual funds may apply this load, and it can impact the net amount received
- Tax on profits – if the sale value is higher than invested value, the difference (i.e. gains) may be subject to taxes as per the applicable rules
- Settlement lag – like shares, mutual fund redemption have a payment period, and you must consider that while planning an outflow based on the sale money
Never sell based on recent stock market performance
Never take action on your mutual fund portfolio, looking at the stock market performance. A falling market pushes investors to panic, and to save losses, investors sell their mutual funds. It is essential to note that although there is a link between the stock market and mutual fund performance. However, the relationship is not always linear as their compositions differ.
Your fund portfolio would include short and long-term debt funds, large-mid-small cap shares, sectoral funds and a cash component. Fall in indices will only impact a specific portion of your portfolio, and hence, there is no need to overreact. Instead, you can make a lump-sum investment and take advantage of a decline in the stock market.
Read more on a similar subject here in my article – Is SIP a better option than one time investment?
How to sell a mutual fund
After determining that the mutual fund must be sold (aka redeemed), an investor can place a sale request through any of the below methods.
Via Asset Management Company (AMC)
Mutual funds bought from the AMC can be sold online through the AMC’s website or by visiting their office. The redemption proceeds will either be credited to your bank account or through a cheque at your registered address.
Using a Demat or Online trading account
When a mutual fund was purchased using a Demat or through an online account, redemption happens in the same account. The sale amount gets credited to the linked bank account.
Through an agent or an advisor
The investor must submit a mutual fund redemption form to the nearest AMC branch or central service provider like CAMS. The agent or the advisor can help to submit the form.
For any redemption request, investors may reach out to central services like CAMS. Investors can also visit the nearest branch office of the AMCs for guidance in respect of redemption.
When to sell a mutual fund? Your financial objectives must guide this decision. It would be best to sell investments when you have either achieved your goal or need the money. The primary aim of investing is to meet a purpose or to ensure that you have the money when you need it.
Avoid taking any action based on a short term performance as mutual fund investments are for a long-term. Unless there is a need to shift the portfolio based on your circumstances, you must continue to invest and remain invested. You will reap the real benefits of investments after 5-10-20 years, so continue participating in the market and stay invested.
The author is a senior finance professional with over fifteen years of work experience in corporate finance and has an affinity for personal finance and investment management. Please leave your comment or share thoughts on this article via email at email@example.com. For more articles, please visit the website www.decodefinance.in.
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