I don’t prefer selling my mutual fund investments but it does not mean that I don’t sell my mutual fund investments at all.
Mutual funds are different from stocks and so buying and selling of mutual funds are not as impulsive as stocks but there can be various reasons to be selling off your mutual fund investments as well.
Selling of mutual funds is often not related to the market as a whole but is mostly driven by personal reasons than the performance of the fund.
So I categorize the need to sale of mutual funds into 3 broad categories.
- Personal Reasons
- Fund Reasons
- Market Environment
1. Personal reasons
You can have your personal reasons to sell your mutual funds investment and they are as follows:
Portfolio needs rebalancing
Say you invested equally in mid-cap and large-cap funds but mid-cap funds outperformed large-cap funds by a significant margin over time and your portfolio is now quite significantly heavy towards mid-cap stocks. You don’t want to remain heavy with mid-cap and so you may want to sell part of your investment from the mid-cap fund to keep a balanced portfolio.
Normally I recommend mutual fund evaluation once every quarter and if you see a portfolio need rebalancing, instead of plain selling you can also opt for a switch from a mid-cap fund to large-cap fund. Technically switching is selling the mutual fund units of one fund and purchasing the other fund units for the same amount.
You Invested in Wrong Fund
You wanted to invest in a large-cap fund but after you invested, you found that though it is a large-cap fund, it is only investing in certain sectors of large-cap stocks which is not what you wanted.
Ideally you should be checking such details in advance but to err is humans and so if you have done a mistake, it’s all ok to be selling your mutual funds even if you will be incurring the entry and the exit load.
We are achieving the financial goal with an investment and if your investment is not something inline with your goal, you should not focus on expenses that are incurred from your investment switch but look at the larger picture as a whole.
Your investment Goals Have Change
You may have invested with a goal in mind and suddenly you have a change in your investment goal which means that your investment may not be right in the funds you may have invested and so it could be a valid reason to be selling off your fund.
As an example, you invested in a debt fund for a world tour vacation plan with your family in a year or so. Your company did fairly well and you were offered a Diwali Bonus as well as a hike in Salary. Now you don’t need the money from your balance fund investment for a vacation anymore. You can now move your investment from a balanced fund to equity fund as you are not in need of money for a few years now.
As opposed to the above example, you invested in equity fund for longer term but you sense a need of some funds in next a year or so (your marriage suddenly got preponed, you relocated to a place and now need a car, want to opt for a vacation … ). Now you may want to switch your part of your equity investment to debt for your near term need of funding.
Your locking period for your mutual fund is over
I normally invest in ELSS mutual funds and when the locking period is over, more often than not I prefer to withdraw my investment and put the same in a new mutual fund for fresh tax benefits. Saving tax without any investment.
2. Fund Reasons
You can always have personal reasons for selling mutual funds, but then there are can be numerous reasons that are not personal for selling your mutual fund investments as well.
Change in Fund manager
When your fund manager changes, you can have a significant change in the performance of your fund and so it could be one of the better reasons to be selling your fund or even the fund house as a whole.
When the fundamentals of a mutual fund scheme change
Mutual funds at times invest in companies that are not as per their scheme and if you find such a discrepancy, you should be selling off your mutual fund because it is not about the performance of fund but it is all about sticking to their guidelines and then performing.
Apart from that the fund can change the scheme related documents to stay on the right of the law and still invest in those stocks. It means to recheck your investment objective and see if the new scheme is inline with your investment objective and if not, time to sell of your investment in the fund.
If you see a fund under performing or is not able to perform for a couple of years from its peers, it is wise to switch out of that fund. I don’t think 1 year of underperformance is something to worry too much about but then it also depends on the amount of underperformance by a fund in a year as well.
Say a fund is providing returns of 5% as against their peers who are providing a return of close to 10% for almost a year could be good reason to switch but an underperformance of 8% against 10% for even a couple of years may not be a reason to switch.
Apply your judgement for underperformance. Just remember that past performance of those performing funds may not continue unless you know why your fund is under performing over its peers.
3. Market Environment
You can have reasons that are neither personal nor related to mutual funds, but they are related to the policies and environment that drive you to sell your mutual funds.
Change in Investment Environment
You witness change in political scenario or policies that can impact certain sectors for investing.
As an example, Indian banks as an investment option have always performed well in the last decade because there were not many new banks coming up in India and the reason could be that new bank licenses were not issued by RBI easily.
We now see that the new government has given new bank licenses. If I remember correctly 20+ new bank licenses in 18 months or so where as we had under 10 bank licenses in last 20 years or so.
Clearly indicating that banks may have fierce competitions in the future and performance of banking and financial stocks will not be as they were in the past. So if you are invested in banking related funds, it can be the right time to exit now.