When should you sell a mutual fund

Investors often sell mutual funds for the worst possible reasons. They should actually sell a fund only when they need the money to meet a financial goal, says Dhirendra Kumar
Every saver knows that there are numerous mutual fund schemes and choosing a suitable one to invest in can be a difficult task. There’s actually an even more difficult choice that investors face—which funds to sell off and when. Curiously, it is the more knowledgeable and more involved investors who face this problem. The reason is, active and involved investors always have an urge to do something. While such investors generally do well because they learn, analyse and act more than others but soon enough, they start equating being good investors with doing something, often anything.

There are many reasons for selling funds, but not all of them are good. There can be exceptions, but the good reasons tend to be about the investor’s own finances and the wrong reasons tend to be about the fund. Let me explain. Overactive investors give three reasons for wanting to sell off a fund. One, they’ve made profits; two, they’ve made losses and three, they’ve made neither profits nor losses. Basically, investors who have a bias for continuous action can create a logic for taking action out of any kind of situation.


So which is the right reason for selling a fund? Obviously, none of the above. By themselves, they are not legitimate reasons for selling a fund. The first comes from the spurious ‘booking profits’ concept that advisers have promoted. Booking profits doesn’t make sense for stocks, and it makes even less sense for mutual funds. In mutual funds, the whole point is that there is a fund manager who is deciding for you which stocks to sell and which to buy. If the fund manager is doing this job well, then the fund will be giving good returns. So, selling a fund that has made good returns is the exact reverse of what investors should be doing.

Let’s come to the second reason now. While selling underperformers is a legitimate idea, evaluate the timeframe and the degree of underperformance. Someone will say that over the last year, my fund has generated 25% but five other funds have generated 30%, so I will switch to those. This switching based on short-term past performance is counter-productive. Only if a fund underperforms consistently for two or more years, and drops down two notches in its rating should you switch away from it. Following a relatively long-period risk-adjusted rating system is the right way to make a decision.

So when should investors actually sell their funds? The right answer is that they should be guided by their own financial goals. You should sell a fund and get your money out when you need it. Let’s say you have invested for five or 10 or 15 years, and now the money has grown to what you need. You need to make a down payment for a house, or pay for your child’s education, you should sell and redeem, irrespective of the state of the market. Unless it’s an expense that can be postponed, you should start acting one or two years before time by withdrawing the money from the equity fund and parking it in a liquid fund. You can use an automated STP (systematic transfer plan) for this, which will be convenient.

In a manner of speaking, the primary goal of investing is not to invest but to sell because that’s when you achieve your goal. Be guided by that.