When Can You Sell a Mutual Fund?

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When can you sell a mutual fund? How do you know when you should or shouldn’t sell mutual funds? What do you do when your mutual funds aren’t bringing in as much profit as you expect?  

Mutual funds are one of the safest and easiest ways to invest. Investors often tell you to buy mutual funds, but rarely when to sell them. 

This article explores situations that may warrant you to sell a mutual fund.

Understand that fluctuations can be short-term

Market fluctuations are normal, and investors should expect them. 

For example, if the market is at an all-time low, you may be highly tempted to sell mutual funds during that rough phase. However, before you do, it’s advisable to check the fund’s historical returns and see how many times it has risen after a crash. 

This does not mean the fund will repeat history. Still, if a fund is notorious for crashing and bouncing back, you can be confident that it will return to normalcy, but this happens if you don’t make a hasty decision to sell your funds.

Situations/Reasons that may warrant you to sell your mutual funds

1. Profit

Making a profit from mutual funds may warrant you to sell. For instance, you might feel you have made enough interest from a unit. 

2. Too many losses

Losses are typical in the stock market. Too many losses, however, are not normal, and this could be a sign to sell.

3. Underperformance

You may be conflicted if a stock is underperforming below its peers, especially if it’s constantly on the news that it is doing poorly while others are performing well. 

You could be tempted to exit the fund and buy the profitable one, but this could be a good time to take a moment and think about why you bought that particular fund. There might also be times when other funds aren’t doing so great, but yours performs much better. 

4. When the investment is static

Suppose the investment is neither here nor there i.e. it’s neither depreciating nor making any gains. Then, getting rid of underperforming funds could sometimes be the logical thing to do. 

5. When the fund changes

There are ways a fund can change, and you should be attentive to these changes. 

For instance, if your fund manager gets replaced with someone else, you’ll need to ask relevant questions about the replacement and know if the fund goal will stay the same or change as well. If you’re not satisfied with what you hear, you can decide to sell. 

6. Market conditions

This is when market conditions affect your funds in a way that makes you lose money fast. This is still a case that requires careful consideration and expert advice, especially due to the nature of the type of funds you choose to invest in. 

7. Risk tolerance

Mutual funds are one of the less risky investment options, and that’s why moderate or conservative investors would prefer them. On the other hand, if you feel mutual funds are not giving you what you want and like to take a chance at riskier investments, then you may decide to sell your funds. 

8. Financial goals

Another logical reason you would sell a mutual fund is when it has served its purpose and helped you reach the financial goal you set for yourself when you initially began investing. 

9. Portfolio rebalancing

A change in your strategy of asset allocation might make you want to revisit your existing holdings and reduce your holding in some industries, e.g. investing more in the tech industry because it’s in a booming phase. 

So if you are already investing a lot in real estate mutual funds, for instance, you may need to rebalance your portfolio. 

10. Financial emergency

If there’s an emergency and your emergency fund is not enough to handle it, then you can look at exiting your current mutual fund. You can always come back in when you are financially better. 

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Wrong reasons for selling mutual funds

Sometimes, deciding to sell your mutual funds may not be the right decision, and some have to do with being emotional rather than logical. 

It could also be that you are paying too much attention to the market fluctuations rather than understanding that volatility is normal. 

Selling mutual funds at a loss

Selling mutual funds at a loss means that you are selling your mutual fund investments for less money than what you originally paid for them. This happens when the market value of your mutual fund shares decreases and can result in a financial loss, but it may be necessary for some reasons we have outlined above.

Things to consider before selling your mutual funds

1. Sell only when necessary 

Sell the mutual fund only when it is absolutely necessary for you to, e.g. an emergency or a pressing need that requires the cash that your mutual fund is worth or when you have reached your investment goal, and want to set a new goal. 

2. Don’t panic sell

Investors often find themselves selling out of fear whenever the market takes a downward turn. Unfortunately, if you sell when the market crashes, you are going to lose when the market recovers.

Read more about How to Avoid Emotion-Based Investing.

3. Has the investment objective changed?

An investor can consider exiting a fund if the investment objective has changed. What was your investment goal at the beginning of the investment? Was it retirement funds or something to keep to build wealth? If the goal at the beginning is not the same as it is in the present state, then you may consider selling the funds. 

4. Market timing

When you realise that timing in the market is difficult, you might be tempted to sell at a higher valuation and buy back when it’s lower. But it may not always work out as planned because the market is unpredictable. 

Do you get charged for selling a mutual fund?

Some funds will charge you a fee if you choose to sell your shares in a mutual fund. This is called a back-end load. 

A back-end load is a fee paid by investors when selling mutual fund shares, and it is a percentage of the value of the fund’s shares. The back-end load tends to go down over time and is often at a flat rate. 

In addition, investors who sell their shares before a specific deadline are subject to early redemption costs, which are charged by the majority of funds.

Bottom line 

Remember that patience is an investor’s most important trait, especially when there are declines in the market. It’s also important to keep your emotions in check and think logically and not impulsively. 

Mutual funds are not stocks. They are a collection of financial assets, including stocks and bonds, selected by a portfolio or fund manager in line with the fund’s objectives. 

Regardless of the market condition, make sure to consult a financial advisor and ask what they recommend for your specific portfolio before selling your funds. To get the best out of any fund you should do thorough due diligence before purchasing.

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