When to Sell a Mutual Fund (2024)

If your mutual fund is yielding a lower return than you anticipated, you may be tempted to cash in your fund units and invest your money elsewhere. The rate of return of other funds may look enticing, but be careful; there are both pros and cons to the redemption of your mutual fund shares. Let's examine the circumstances in which liquidation of your fund units would be most optimal and when it may have negative consequences.

Key Takeaways

  • When it comes to redeeming mutual fund shares, investors should be mindful of the pros and cons of doing so.
  • Tax consequences and back-end loads demand utmost consideration when investors contemplate the prospect of cashing in their mutual fund units.
  • Some times are more appropriate than others, for cashing out of a mutual fund. Topping the list are the following scenarios:
  1. When there's been a change of fund manager(s)
  2. When there's been a change to a fund's investment strategy
  3. When a fund has consistently underperformed
  4. When a fund grows too big to meet an investors goals

Mutual Funds Are Not Stocks

The first thing you need to understand is that mutual funds are not synonymous with stocks. So, a decline in the stock market does not necessarily mean that it is time to sell the fund. Stocks are single entities with rates of return associated with what the market will bear. Stocks are driven by the "buy low, sell high" rationale, which explains why, in a falling stock market, many investors panic and quickly dump all of their stock-oriented assets.

Mutual funds are not singular entities; they are portfolios of financial instruments, such as stocks and bonds, chosen by a portfolio or fund manager in accordance with the fund's strategy. An advantage of this portfolio of assets is diversification.

There are many types of mutual funds, and their degrees of diversification vary. Sector funds, for instance, will have the least diversification, while balanced funds will have the most. Within all mutual funds, however, the decline of one or a few of the stocks can be offset by other assets within the portfolio that are either holding steady or increasing in value.

Because mutual funds are diversified portfolios rather than single entities, relying only on market timing to sell your fund may be a useless strategy since a fund's portfolio may represent different kinds of markets. Also, because mutual funds are geared toward long-term returns, a rate of return that is lower than anticipated during the first year is not necessarily a sign to sell.

Relying only on market timing to sell your fund may be a useless strategy since a mutual fund's portfolio may represent different kinds of markets.

When Selling Your Fund

When you are cashing in your mutual fund units, there are a couple of factors to consider that may affect your return:

Back-End Loads

If you are an investor who holds a fund that charges a back-end load, the total you receive when redeeming your units will be affected. Front-end loads, on the other hand, are sales fees charged when you first invest your money into the fund. So, if you had a front-end sales charge of 2%, your initial investment would have been reduced by 2%.

If your fund has a back-end load, charges will be deducted from your total redemption value. For many funds, back-end loads tend to be higher when you liquidate your units earlier rather than later, so you need to determine if liquidating your units now is optimal.

Tax Consequences

If your mutual fund has realized significant capital gains in the past, you may be subject to capital gains taxes if the fund is held within a taxable account. The cost basis you choose can impact your bottom-line capital gains and losses. When you redeem units of a fund that has a value greater than the total cost, you will have a taxable gain.

Note that while you may not have sold your mutual fund shares, the fund's portfolio may have undergone taxable events that you may be responsible for paying your share of. For instance, if a portfolio manager sells holdings in the fund for short-term capital gains.

For many funds, back-end loads tend to be higher when you liquidate your units earlier rather than later, so you need to determine if liquidating your units now is optimal.

When Your Fund Changes

Do keep in mind that even if your fund is geared to yielding long-term rates of returns, that does not mean you have to hold onto the fund through thick and thin. The purpose of a mutual fund is to increase your investment over time, not to demonstrate your loyalty to a particular sector or group of assets or a specific fund manager. To paraphrase Kenny Rogers, the key to successful mutual fund investing is "knowing when to hold 'em and knowing when to fold 'em."

The following four situations are not necessarily indications that you should fold, but they are situations that should raise a red flag:

Change in a Fund's Manager

When you put your money into a fund, you are putting a certain amount of trust into the fund manager's expertise and knowledge, which you hope will lead to an outstanding return on an investment that suits your investment goals. If your quarterly or annual report indicates that your fund has a new manager, pay attention. If the fund mimics a certain index or benchmark, it may be less of a worry as these funds tend to be less actively managed.

For other funds, the prospectus should indicate the reason for the change in manager. If the prospectus states that the fund's goal will remain the same, it may be a good idea to watch the fund's returns over the next year. For further peace of mind, you could also research the new manager's previous experience and performance.

Change in Strategy

If you researched your fund before investing in it, you most likely invested in a fund that accurately reflects your financial goals. If your fund manager suddenly starts to invest in financial instruments that do not reflect the mutual fund's original goals, you may want to re-evaluate the fund you are holding.

For example, if your small-cap fund starts investing in a few medium or large-cap stocks, the risk and direction of the fund may change. Note that funds are typically required to notify shareholders of any changes to the original prospectus.

Additionally, some funds may change their names to attract more customers, and when a mutual fund changes its name, sometimes its strategies also change. Remember, you should be comfortable with the direction of the fund, so if changes bother you, get rid of it.

Consistent Underperformance

This can be tricky since the definition of "underperformance" differs from investor to investor. If the mutual fund returns have been poor over a period of less than a year, liquidating your holdings in the portfolio may not be the best idea since the mutual fund may simply be experiencing some short-term fluctuations.

However, if you have noticed significantly poor performance over the last two or more years, it may be time to cut your losses and move on. To help your decision, compare the fund's performance to a suitable benchmark or to similar funds. Exceptionally poor comparative performance should be a signal to sell the fund.

The Fund Becomes Too Big

In many cases, a fund's quick growth can hinder performance. The bigger the fund, the harder it is for a portfolio to move assets effectively. Note that fund size usually becomes more of an issue for focused funds or small-cap funds, which either deal with a smaller number of shares or invest in stock that has low volume and liquidity.

When Your Personal Investment Portfolio Changes

Besides changes in the mutual fund itself, other changes in your personal portfolio may require you to redeem your mutual fund units and transfer your money into a more suitable portfolio. Here are two reasons which might prompt you to liquidate your mutual fund units:

Portfolio rebalancing

If you have a set asset allocation model to which you would like to adhere, you may need to rebalance your holdings at the end of the year in order to return your portfolio back to its original state. In these cases, you may need to sell or even purchase more of a fund within your portfolio to bring your portfolio back to its original equilibrium.

You may also have to think about rebalancing if your investment goals change. For instance, if you decide to change your growth strategy to one that provides steady income, your current holdings in growth funds may no longer be appropriate.

Taxes


If your fund has suffered significant capital losses and you need a tax break to offset realized capital gains of your other investments, you may want to redeem your mutual fund units in order to apply the capital loss to your capital gains.

The Bottom Line

Selling a mutual fund isn't something you do impulsively. It's important to give the decision a great deal of thought. Remember that you originally invested in your mutual fund because you were confident in it, so make sure you are clear on your reasons for letting it go. However, if you have carefully considered all the pros and cons of your fund's performance and you still think you should sell it, do it and don't look back.

When to Sell a Mutual Fund (2024)

FAQs

When to Sell a Mutual Fund? ›

If your financial goals have shifted, it may be time to realign by selling. For example, if you initially invested in an aggressive growth fund but now require more stability and income, you might consider selling the fund shares and reallocating your investments.

When should you cash out a mutual fund? ›

This decision solely depends on your goals as an investor. Investors can redeem mutual funds in order to liquidate cash for short term goals like buying a car, or going for a vacation or long term goals like investing in real estate, child's education/marriage, retirement, etc.

Is there a best time to sell a mutual fund? ›

However, if you have noticed significantly poor performance over the last two or more years, it may be time to cut your losses and move on. To help your decision, compare the fund's performance to a suitable benchmark or to similar funds. Exceptionally poor comparative performance should be a signal to sell the fund.

How long should you keep money in a mutual fund? ›

Mutual funds have sales charges, and that can take a big bite out of your return in the short run. To mitigate the impact of these charges, an investment horizon of at least five years is ideal.

Should I sell my mutual funds when market is high? ›

Interrupting or ceasing investments during market peaks or due to apprehensions about a correction is counterproductive to reaching your financial objectives. Bhatt adds, “Instead of stopping completely, you could choose to reduce your SIP or lump-sum amount until market conditions seem less frothy.

How do I know when to exit a mutual fund? ›

Assess how the fund fares compared to its category peers and relevant benchmark indices to determine if it consistently lags. If a fund consistently underperforms over multiple periods and fails to deliver satisfactory returns, consider exiting the investment.

How much tax will I pay if I cash out my mutual funds? ›

If you receive a distribution from a fund that results from the sale of a security the fund held for only six months, that distribution is taxed at your ordinary-income tax rate. If the fund held the security for several years, however, then those funds are subject to the capital gains tax instead.

Should I sell mutual funds before a recession? ›

No, you shouldn't sell your mutual funds before a recession. Even if you're uncomfortable with the market price decline, overreacting and selling mutual funds at a loss when there is a market drop or recession isn't a sound strategy. It's best to set aside cash for use during recessions and before a market downturn.

When to liquidate a mutual fund? ›

Times to Sell

While they are good investment options for several investors, you may think of redeeming the shares in your mutual fund in the following circumstances: If the fund manager has changed. If the investment plan and strategy of the fund has been altered. If the fund has been consistently underperforming.

Is there a penalty for selling mutual funds? ›

You're allowed to sell your mutual fund holdings at any time after buying shares. But there may be consequences based on the type of mutual fund you own. For instance, some fund companies charge an early redemption fee if you sell your shares before a prescribed period of time.

How long should mutual funds be kept? ›

The ideal duration for staying invested in mutual funds can vary based on individual financial goals, risk tolerance, and investment horizon. However, generally, it's recommended to stay invested for at least 3 to 5 years to potentially ride out market fluctuations and benefit from compounding returns.

What is the 4% rule for mutual funds? ›

Say an investor has retired with a $1 million portfolio. In her first year of retirement, under the 4% rule, she should withdraw 4% of that portfolio, or $40,000 ($1 million x 0.04). For each subsequent year, she should adjust the withdrawal amount for inflation.

What is the 80% rule for mutual funds? ›

The Names Rule currently requires registered investment companies whose names suggest a focus in a particular type of investment to adopt a policy to invest at least 80 percent of the value of their assets in those investments (an “80 percent investment policy”).

What is the best way to sell mutual funds? ›

Selling mutual fund shares

Mutual fund shares are sold the same way that they're bought: either through the fund company directly or through your broker. You'll receive the next available net asset value as your price for each share sold. You'll also have to pay any applicable fees or charges.

What is the 30 day rule on mutual funds? ›

To discourage excessive trading and protect the interests of long-term investors, mutual funds keep a close eye on shareholders who sell shares within 30 days of purchase – called round-trip trading – or try to time the market to profit from short-term changes in a fund's NAV.

What is the best time of day to sell mutual funds? ›

Unlike stocks and ETFs, mutual funds trade only once per day, after the markets close at 4 p.m. ET. If you enter a trade to buy or sell shares of a mutual fund, your trade will be executed at the next available net asset value, which is calculated after the market closes and typically posted by 6 p.m. ET.

Is it a good time to withdraw money from a mutual fund? ›

The right time to redeem mutual funds depends on your financial goals and the performance of the fund. You should redeem your units when you are close to achieving your goal or when the fund is not meeting your expectations.

What is the best time to redeem mutual funds? ›

Redemption is usually done when the investor needs funds, the objective of the investment is fulfilled, or when the financial plan review demands a change in allocation, or the scheme is not able to deliver desired results.

When should you pull out of a fund? ›

Selling an outperforming fund

Lowcock adds that when a fund has been outperforming over a period of six months to three years, it is a good idea to take profits in order to protect capital in case the market turns. "If you don't, the market will do it for you," he added.

Should I withdraw my mutual fund before recession? ›

No, you shouldn't sell your mutual funds before a recession. Even if you're uncomfortable with the market price decline, overreacting and selling mutual funds at a loss when there is a market drop or recession isn't a sound strategy. It's best to set aside cash for use during recessions and before a market downturn.

References

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Reed Wilderman

Last Updated:

Views: 5289

Rating: 4.1 / 5 (72 voted)

Reviews: 95% of readers found this page helpful

Author information

Name: Reed Wilderman

Birthday: 1992-06-14

Address: 998 Estell Village, Lake Oscarberg, SD 48713-6877

Phone: +21813267449721

Job: Technology Engineer

Hobby: Swimming, Do it yourself, Beekeeping, Lapidary, Cosplaying, Hiking, Graffiti

Introduction: My name is Reed Wilderman, I am a faithful, bright, lucky, adventurous, lively, rich, vast person who loves writing and wants to share my knowledge and understanding with you.