While most investors understand how to buy mutual funds, they still remain confused about when to sell their investment. Ideally, you should consider selling your mutual fund units if your fund is offering consistently low returns over a prolonged time period of 3 years or more. There are also other instances when selling your investment may be a prudent decision. In this article, we explore the reasons why you should sell your mutual fund units and cash out your investment.

Mutual fund investors often wonder when is the right time to sell their investment. Here’s a list of scenarios when you can consider selling your mutual funds:

If your goal is achieved

Goal fulfilment is a valid reason to sell your mutual fund units. If you have invested in a particular fund to fulfil a specific purpose like buying a car or planning a vacation, you can exit the fund once you’ve met your investment goal. You should also consider redeeming your investment if you have invested primarily in equity funds for a long-term goal and are approaching that goal. Ideally, you should transition from equity to safer fund options like liquid funds about 15-18 months prior to reaching your goal. This helps you shield your corpus from market swings and volatility right before the goal maturity date.

If your fund is consistently underperforming

Consistent underperformance of the fund is yet another valid reason for selling your mutual fund investment for a better option. However, before you exit the investment, you must compare the returns of the fund against benchmarks and peer funds, especially the best performing funds in that specific category. This strategic approach will give you a holistic view of the market to make an informed choice and understand if the reason for underperformance is fund-specific or a result of broader market factors. If you find all funds underperforming, along with the benchmark, it may be caused due to a broader market slowdown. In such cases, it may not be prudent to sell your mutual fund investments. Rather you can wait for the market to rebound and see if the fund recovers.

Also read: What Is Systematic Withdrawal Plan (SWP)
 

If there is a fundamental change in the fund

Every mutual fund scheme has a specific investment objective that’s outlined in the scheme offering document. The overall investment strategy and every subsequent investment decision taken by the fund manager is based on the fund’s inherent investment objective. Sometimes the investment objective of the fund may be altered resulting in a fundamental change in the fund. This can result in the fund’s objective becoming misaligned with your own investment objectives. In such cases, selling the fund and investing the sum in another fund that better aligns with your goals is prudent. Similarly, there may be times when the scheme may witness certain structural changes like merger with another scheme or changes at the AMC level. In these instances, you have to evaluate whether the proposed changes align with your own investment thesis. If they don’t, it’s best to sell your MF investment.

Also read: What Is Compound Annual Growth Rate (CAGR)
 

If your investment style changes

Each mutual fund scheme follows a specific investment style. For instance, some may follow a value approach, while others may implement a growth style. As an investor, you invest in a mutual fund only if it aligns with your own investment style. Essentially, this investment style lays out a set of criteria that needs to be followed to select assets for the fund’s portfolio. Changes in the investment style of a fund is a good reason to sell your mutual fund units. Investment styles may change due to various reasons like the entry of a new fund manager or fresh directives from the AMC to switch styles for better performance. If the new investment style does not coincide with your objectives, it’s best to rebalance your portfolio and sell your units.

Also read: What Systematic Transfer Plan (STP)

If your portfolio gets skewed towards one asset class

One of the most common and valid reasons to sell your mutual fund investment is a skewed portfolio. Oftentimes, bull runs can move your portfolio away from its target asset allocation mix. With significant returns accumulating during a bull phase, the equity portion of your portfolio may rise. Consequently, this results in losing a portion of debt that was offering stability and balance to the portfolio. In such cases, you will need to rebalance your portfolio and may need to sell some equity fund units.

Also read: What Is XIRR in Mutual Funds

• Redeeming your mutual fund units makes sense when you have achieved the attached financial goal.
• Exiting your investment is also prudent if the fund is consistently underperforming for a prolonged time period.
• You should consider selling your units if the fund’s changed objectives and investment style don’t align with yours.

Understanding the reasons why you should sell your mutual fund investments can help you avoid panic selling them during market lows and liquidating positions early during bull runs. You can refer to the above-listed reasons to sell your mutual fund units when deciding on the right time to exit the investment. However, you should always remember that selling your mutual fund units at the right time can help optimise returns and achieve your long-term wealth creation goal.
 

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