When to Sell a Mutual Fund

Investing in mutual funds is different than investing in stocks or bonds. The reasons why you sell a mutual fund are not the same as stocks or bonds. If you invest in stocks you buy single entities of one or more companies, the key for success is buying low and selling high.

Conversely, mutual funds are portfolios of different stocks and bonds and are selected by fund managers according to the strategy of these mutual funds (for example sector funds, index funds, balanced funds, country mutual funds etc.). An advantage of mutual funds is diversification and is the most important reason why selling a mutual fund is different than stocks.

Many investors sell their stocks in a fallen stock market and often panic influences their decision. Selling mutual funds is totally different because many are typically invested in different markets. A decline of certain stocks in your mutual fund does not always mean the value of your mutual funds will decrease. Some other stocks in your mutual funds may rise and it is possible the value of your mutual funds is still the same or your loss is limited. Even if the value of your mutual fund has decreased you have to investigate the reasons and maybe it is the moment to invest more in your mutual fund.

However, mutual funds are long-term investments and have a diversification strategy; there are reasons which may decide to sell your mutual fund:

*You need the money

Maybe you consider buying a house, a car, a new television or something else but you don’t have the money in your savings account. You can take a loan or sell your mutual funds. If your expected return of your mutual fund is lower than the rate of the loan it is best you sell your mutual funds.

*Your investment strategy is not conform your profile

You are a balanced investor and bought mutual funds which invest for 50% in shares and 50% in stocks. After a few years your invested capital in mutual funds is increased but you notice it doesn’t fit your investment profile anymore. Maybe your invested capital is now 70% in mutual funds which invest in stocks and 30% in mutual funds which invest in bonds. You can best sell some mutual funds which invest in stocks until your investment strategy is back to the same point as you started.

*You are in a different stage of your life

If you become nearer to the age of retirement you can consider limiting your risk and choose a more defensive investment strategy. It may be best to sell your aggressive mutual funds and buy more conservative ones.

*An exaggerated return in a few months

It may happen if you invest in emerging markets that you reach a return of 50% or even 100% in 6 months or even sooner; in this case you can consider selling a few entities of your mutual fund to protect your profit and keep your original invested money in this fund. If your fund is overvalued it is best to sell your fund completely.

*A switch in the style of your mutual fund

If you bought a mutual fund to help diversify your portfolio and this fund invested, for example in blue caps, but the manager of this fund switched his style and you notice you are investing in small caps now, you can consider selling your mutual fund because your intention was totally different.

*Your mutual fund is underperforming

This is one of the main reasons why many investors make a mistake. Mutual funds are long-term investments and maybe your returns are lower than the return of the most funds. You need to be careful to sell these mutual funds and that you compare the performance after several years with mutual funds which have a similar investment strategy. It is possible your fund is underperforming compared with such mutual funds and you can decide to sell your fund.

There are plenty of reasons which may decide you to sell your mutual fund but it is important to know mutual funds are long-term investments and you need to look to the performance after several years. In general we can say that most mutual funds are investments for at least 5 years and most of them even 10 years for reaching a good average return.

Don’t panic if the value of your mutual fund decreases the first year with for example 5%, maybe after 5 years your return will be much higher than in a savings account. It is also important to know you have to pay purchase costs of 2% and it can take some time before you reach a good return. You only have to pay these costs once.

Deciding when to sell a mutual fund is a difficult task but it is necessary to follow up the returns of your mutual funds and keep an eye if your portfolio is conform your investment strategy.