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We all invest to generate returns in the future. We all invest towards our goals and wish to fund them through the return from our investments. Investing is never successful if you do not have an exit strategy. In other words, your job doesn’t end with picking the right fund and investing in it. You need to have an exit plan in order to benefit from your investments. That brings us to the question of when to sell mutual funds?

You may strategically exit your fund during your investment tenure or make sudden exit plans. Before you plan your exit strategy, you must evaluate whether exiting the investment is beneficial or will have negative consequences.

10 Scenarios You Should Consider Selling Mutual Funds

Following are the scenarios under which you can consider selling your mutual fund holdings:

1. When Your Investment Objectives are Met

Most of us invest in mutual funds intending to achieve our financial goals. Therefore, when you are nearing your goal tenure, you can consider exiting your investments or moving them to less risky options. For example, if your investments were in a pure equity scheme and are almost nearing your investment tenure, you can move your investments to a less risky option, say debt funds.

2. When Your Investment Preferences Change

Our investment preferences may not be the same throughout the investment tenure. For example, when we are young, we would want to invest across high-risk funds to be able to generate significant returns. But with age, we would become more conservative with our investments and would want to invest across more stable assets. Thus, if you realize a change in your investment objective, you may want to reconsider your portfolio allocation and make necessary adjustments to it. For example, selling your high risk mutual funds and replacing them with medium-risk ones.

3. Consistent Underperformance of the Fund

Consistent underperformance of the fund can often be a cause for concern. Especially with actively managed funds, consistent underperformance of the fund can significantly impact the overall returns. The fund manager plays a very important role in the fund’s performance.

However, you should not sell your mutual funds if the underperformance is for a very short duration. It may sometimes be due to the fund manager’s error in picking the right securities for investment. For instance, if the fund has performed well across market conditions, you may wait to see if the fund is able to recover quickly from this underperformance.

Furthermore, the underperformance of a mutual fund can be due to the overall market collapse. Taking the example of the Covid 19 pandemic, where the markets were highly volatile. Most investors engaged in panic selling in response to the pandemic, resulting in a market crash. Thus, you must carefully analyze the reason for underperformance and also compare your fund’s performance with its peers.

You need to understand if the drop in performance is only for your fund or across all the schemes belonging to the category. If the latter is true, you may want to wait until the market recovers before exiting the scheme. In the case of the former, you may want to analyze the portfolio, changes and take the exit call.

However, it is important to exit your holdings if you observe a consistent underperformance of the fund for a period of more than six months. Since markets are volatile, underperformance for a short period doesn’t necessarily lead to exiting the scheme.

4. When the Fund’s Strategy Changes

While investing, we all carefully consider the fund’s investment objective and invest only when it perfectly aligns with our financial goals. Furthermore, we ensure that the asset allocation and risk exposure are comfortable for us. In case of any change in the fund’s investment strategy or risk exposure levels, we must re-evaluate whether the fund still aligns with our investment objective or not.

Therefore, if you realize that the fund’s investment objective no longer aligns with your goals, you may consider selling your holdings. Also, when a fund investment strategy changes, the exit load is often waived off. Though there may not be any exit load, you may have to consider the tax implications for your redemptions.

5. When the Fund Manager Changes

For actively managed mutual funds, the fund manager plays an important role. The fund manager’s decisions significantly impact the fund’s performance. However, this may not be the case with passively managed funds. Since passively managed funds replicate the benchmark index, and thus, the fund manager’s role is limited.

The change in fund management can impact the fund’s performance either positively or negatively. The fund performance may enhance with the new fund manager. At the same time, the risk of underperformance is also high. Therefore, if you notice any changes in the fund management for actively managed funds, you may have to keep a close eye on the fund. If you witness that the fund manager’s investment strategies do not align with your goals, you may consider exiting the scheme.

6. Increase in Fund Size

When a fund has significant growth, its performance may be compromised. It becomes more difficult to manage a large portfolio. This problem is most common in concentrated or small-cap funds, which invest in equities with limited volume and liquidity or deal with fewer shares. It is preferable to sell your mutual fund units in such a situation.

7. In Case of Emergencies

Emergencies can knock on your door at any time. The biggest advantage of investing in mutual funds is liquidity. Thus, you can redeem your fund units at any time. In case of emergencies, you need not worry about timing your exit. You can simply exit the investments to meet your emergency needs. However, some funds may take up to two working days to transfer the amount to your bank account.

8. Portfolio Rebalancing

Portfolio rebalancing is necessary to analyse if your investment portfolio is still in line with your goals and risk tolerance levels. Especially when you have a long-term investment tenure, you should analyse your portfolio from time to time. In case of any changes in your goals or risk levels, or any changes in the fund’s objectives and strategies, you should consider rebalancing your portfolio.

Rebalancing does not necessarily mean that you should exit your holdings. Rebalancing your portfolio can be stopping current investments in a scheme and diverting them to another scheme. Also, if you witness underperformance of certain funds, you may want to replace them with new funds.

Furthermore, you may want to adjust your holding across asset classes with time. For example, you may be conformable with high equity exposure when you are young. While you near retirement, you may have to rebalance your portfolio by increasing the debt allocation and reducing equity exposure. Thus, portfolio rebalancing strategies will help you decide whether or not to sell your mutual funds.

9. When You Want Regular Income

When you want regular income from your mutual fund investments while protecting your capital, you can plan for Systematic Withdrawal Plan (SWP). Do not convert a mutual fund scheme to a dividend option for regular cash flows. Following an SWP approach will be more efficient. SWP is also tax efficient.

You can redeem your assets in instalments when you choose an SWP plan. Your mutual fund investments can be directed to your savings account. The mutual fund’s value in an SWP is reduced by the number of units you remove.

10. Market Circumstances

While this is not a highly suggested approach, you can benefit from it if you are well aware of the market conditions. Timing the market is never advisable. However, if you witness a good opportunity to exit your investments, you may consider it. Do not hesitate to consult a financial advisor in case of any doubt. Consulting an advisor will help you analyze the situation with a broader perspective and help you make a more informed decision.

Avoid Selling Mutual Fund Under These Scenarios

Now that you are well aware of when to sell your mutual funds, it is important to know when you shouldn’t sell your mutual funds. The following scenarios will tell you when you should not sell your mutual fund investments:

1. Don’t Sell Mutual Fund Units Based on Stock Performance

It’s important to keep a watch on the stock market, but don’t let it affect you too much. When the markets begin to collapse, many people make the error of selling their mutual funds in anticipation of large losses. However, selling mutual funds based on stock market performance may deprive you of otherwise available benefits.

Mutual funds have a diversified portfolio that invests across different securities apart from equities, for example, fixed income instruments, gold, and forex. Since the investments are diversified across different asset classes, the impact of a stock market crash may not be as harsh as a pure equity investment. Moreover, during a market crash, you will be able to accumulate a higher number of units of a fund with your investments. As a result, your gains will be higher when the fund recovers.

Therefore, do not sell the mutual fund in a hurry because you may lose out on future profits. Before selecting whether or not to sell a mutual fund, you should consider the actual impact of market volatility.

2. Avoid Making Decisions Based on Short-Term Performance

You won’t make much money if you buy mutual funds with a short-term outlook. Make a long-term investing goal and set realistic performance expectations for mutual funds. Invest in mutual funds for the long term to get the full benefits. Selling a mutual fund after a period of poor performance may not be the right strategy, and you may lose the potential to generate significant returns in the long term.

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