Should I Sell My Mutual Fund?
Recently, the stock and bond markets have taken a tumble. This extreme price volatility reminds us that investing in the financial markets requires patience and a long-time horizon. But does this market volatility mean you need to sell your mutual fund?
Selling a mutual fund or ETF is a tough decision.
The seesaw prices underline experts’ advice to long-term investors: Keep to your plan and stomach the troughs. Smart investing is like a long sea voyage, not a quick shoot. The answer to the question, ‘Should I sell my mutual fund – due to the market ups and downs?’ is a resounding ‘No.’
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Still, that doesn’t mean your holdings should be set in stone. Experts say there are scenarios — even in seemingly rosy times — in which you would do well to sell a mutual fund.
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What Are the Signs it May Be Time to Sell Your Mutual Funds?
Below are 13 top indicators of selling mutual funds for cash:
Consistent Underperformance of the Mutual FundA Bad Case of Asset Class BloatA ‘closeted’ index fundAvailability of Cheaper Equivalent OptionYou Want off the Roller CoasterShifting to Different Financial ModulesImpacted Debt fundsMutual Fund Basic Objectives ChangesChange of Fund’s ManagerMutual Fund’s Demerger or MergerCapital Loss OccurrenceAchievement of Your Investment ObjectiveLock in a Gain
1. Consistent Underperformance of the Mutual Fund
Understand the fund’s benchmark. If you are invested in a passively managed index fund that tracks the S&P 500 and your fund underperforms the benchmark significantly, it may be time to shift to another mutual fund.
Even if your mutual fund is actively managed, its performance is typically compared with the performance of a passively managed index fund. If the benchmark is doing better than the fund, over more than a year or two, it may be time to sell your mutual fund.
2. A Bad Case of Asset Class Bloat?
A balanced portfolio is like a balanced diet — both are essential for long-term health. If you’re eating more meat than greens, that will come back to haunt your waistline.
Similarly, strongly performing mutual funds can result in a bloated asset class, such as stocks or bonds. If your stock mutual funds do well, a portfolio originally allocated to 60% stock funds and 40% bond funds can become a 70%-30% split instead. For many investors, that signals it’s time to rebalance the portfolio, as it may present portfolio management challenges.
By rebalancing regularly, you will continually be buying low and selling high. That means you sell the excellently performing investments (stock mutual funds in this case) and buy additional shares that aren’t doing well.
Rebalancing takes your investment portfolio to its original course (target asset allocation). You can do so regularly or when allocations change by a specific percentage.
3. A ‘closeted’ index fund
Closet index funds can overcharge. If your fund’s performance is essentially tracking an index, such as the S&P 500, while still charging a premium for active management, it may be time to sell that mutual fund. A closet index fund is when an active manager holds a bulk of the same stocks as an index, and charges for active fund management.
An index fund can charge fees as low as 0.04% of your account value, while actively managed funds might charge a management fee of 0.70% or more over time. Usually, the latter carry higher expense ratios than the former. You pay a professional to manage your portfolio, in an attempt to outperform an index, not to copy one.
Closet index funds tend to underperform their benchmark because of the management fees.
Generally, most actively managed funds underperform a passive index fund asset allocation model. Unless there’s an extremely good reason for going with a high-fee actively managed fund, you’re better off sticking with the low-fee index fund approach.
4. Availability of Cheaper Equivalent Option
As more exchange-traded funds and index funds compete on fees, costs are continually being driven down. Check to see if your online broker offers funds within the same category as those you own but with lower expense ratios.
Fees are inherent in all mutual funds and exchange-traded funds, and over time they can significantly drag down your portfolio returns.
Forrest Baumhover, a financial planner and founder of Westchase Financial Planning, explains it this way in a recent NerdWallet article:
Two investors have half a million dollars in something virtually identical regarding investment philosophy and positions. However, one is an index fund that tracks the market, and the other is an actively managed fund with similar performance. The difference [in what you’d pay in fees] could be 75 basis points. (75 basis points is equivalent to 0.75%).
That amounts to almost $4,000 a year.
5. You Want Off the Roller Coaster
Stock market fluctuations aren’t a reason to change your portfolio. However, if your risk tolerance changes, either up or down, it may be an ideal time to redeem your mutual funds.
Hence, if your current asset allocation is causing you to lose sleep, either because of stomach-churning market drops or a feeling that you need to invest more aggressively, perhaps it’s time to revisit your risk absorption ability and investment targets.
Calculate how much risk you need to take to meet your goals, and then stick with that asset allocation. There’s no reason to invest with more risk than is needed to meet your long term financial goals.
6. Shifting to Different Financial Modules
Most investors realize that the ‘’don’t put all your eggs in one basket” proverb is a reality in the investment world. They don’t invest all their money in the same type of mutual funds. Thus, if your portfolio isn’t properly diversified, among stock and bond mutual funds as well as cash, then you may want to venture into a different financial module. You might want to up the risk and go for an alternative investment, or try an all-in-one target date fund.
Alternatively, you may desire to have a predictable and consistent income stream. outcome. In this case, you can utilize a Systematic Withdrawal Plan (SIP): Redeem your money while receiving returns on the unredeemed portion. Tax-free bonds, short term fixed income mutual funds and certificates of deposit are ideal investments that can give you consistent returns.
7. Impacted Debt funds
A change in the interest rates has an inverse and direct impact on bond prices and yields, respectively. Thus, when the Federal Reserve (Fed) increases rates, existing bonds market prices decrease while the yields increase. That results from new bonds entering the market offering higher interest rates to investors.
On the other hand, if the Fed lowers the rates, the bond prices will increase while yields for the debt fund decreases. In some circumstances, selling off your mutual funds is advisable. When interest rates are higher, you might prefer medium and longer term bond mutual funds, to capture potential longer term returns (it’s important to note that on occasion, long term interest rates might note be higher than shorter term rates), and benefit from price appreciation, when interest rates decline. When interest rates are rising, short term bond funds enable you to benefit from higher interest payments, as interest rates rise.
8. Mutual Fund Scheme Basic Objectives Changes
A significant shift in the underlying assumptions of your mutual fund’s objective can indicate it’s time to redeem it. Sell off the mutual fund units if the instrument’s factors or investment objectives for which you bought the mutual fund no longer applies.
For instance, your goal could be investing in a small-cap fund to expose your money to small-cap firms only. In case the fund management starts buying large stocks, the move may negatively impact your investment plan. An appropriate remedy might be to sell your fund and stick to your preferred investing strategy.
9. Change of Fund’s Manager
WIth active mutual fund investing, when a portfolio manager shifts, you might want to explore whether to sell the mutual fund or not. examine. The manager is crucial to the success of your funds.
Therefore, it’s essential to do a thorough background check and assess the track record of the incoming fund manager. You may consider selling your mutual fund if the new manager isn’t up to the task.
10. Occurrence of Demerger or Merger
When Asset Management Companies (AMCs) demerge or merge, you aren’t sure if the new firm will perform the same as the one you invested in. While the combination may be due to various reasons, only stay invested if the performance and strategy aligns with your original objectives. Also, examine the mutual fund’s performance and strategy under the new management. If you’re not satisfied, shift to a new equivalent mutual fund with a different AMC.
11. Capital Loss Occurrence
When your mutual fund has a significant capital loss, while other holdings incur capital gains, it might be time to sell. In such a case, if you sell the fund, you’ll be able to secure a capital loss on your tax return. That loss can offset realized capital gains and ultimately lower your tax bill. For that reason, this tax-loss harvesting situation might be a reason to sell your mutual fund.
12. Achievement of Your Investment Objective
When you reach your investment goals it might be time to sell all or a portion of a mutual fund. Selling your mutual funds a few years before attaining your investment objectives is another option. After your financial goals are realized you might want to sell higher risk stock or alternative mutual funds and invest in lower-risk fixed income and cash assets. That will preserve your capital and remove the volatility that higher risk assets contribute to a portfolio.
13. Lock in a Gain
Narrowly focused funds, such as strategy or sector mutual funds can contribute excellent returns during certain time periods. If you own narrowly focused mutual funds that have experienced a run up in price, then it might be time to trim the position. In this circumstance, consider selling all or a portion of the appreciated mutual fund, in order to lock in your profits.
Additionally, if you wouldn’t buy a mutual fund at its current price, then you might consider selling it.
14. Rebalancing of Your Asset Allocation
Every year or so, it’s a good idea to rebalance your investment portfolio. Your asset allocation is your pre-decided mix of stock and bond funds. For example, you might choose 70% in stocks and 30% in bonds. At the end of the year, if the stock market does better than the bond market, you portfolio might end up with 75% in stocks and 25% in bonds.
Sell five percent of your stock mutual funds or ETFs and use the cash to buy bond mutual funds. This realigns your investments with your initial goals, and also ensures that you’re buying funds at a lower price, and selling at a higher one.
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FAQ
Yes, it’s a good time to sell mutual funds when you attain your financial objective or want to invest in a different type of security. However, remaining invested is advisable if you haven’t reached your goal or lack another appropriate investment. It’s also a good time to sell if your asset allocation needs rebalancing.It’s not usually wise to sell mutual funds or ETFs after a stock market decline, as you will lock in the loss. Timing the markets is notoriously difficult and once you sell, you need to figure out when to buy back in. And if not timed perfectly, you can easily miss a mutual fund’s rebound in price.
When there is a stock market decline, your equity or stock mutual funds typically decline in value. Less correlated mutual funds, particularly bond funds, frequently protect against a loss in case of a stock market crash. Unfortunately, the 2022 market crash bucked this trend.Some alternatives and cash can also offset losses when equity funds go down. It’s useful to remember that market crashes occur periodically and long term investors should stick with their original investment plan.
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.Only have money invested in the financial markets that you won’t need during the next few years. That way, regardless of whether there’s a recession or not, you won’t be forced to sell at a loss.
The best method for selling mutual funds online is through a transaction page of your investment company. Follow the simple steps below:Log into your account and visit your account home pageSelect the fund you want to sellIndicate the number of mutual fund units to redeemComplete your transaction
Yes, you can place an order to sell mutual funds anytime. Although, unlike stock and ETF trades, mutual funds only trade once per day, after the market closes. So, regardless of when your trade is placed, it will occur at the end of the day.
You should plan to hold your mutual funds for at least 5 years. In the short term stock and bond fund prices can be volatile. Yet, over the long term their prices typically go up. The instruments can deliver more stable returns if you increase the holding duration to 10 years or more. For short term cash needs, the only mutual funds to consider are money market mutual funds and short term bond funds, as they maintain a relatively stable price.
Conclusion
When investing, staying the course is usually a smart strategy, but sometimes you’re better off selling your mutual fund shares. Consider these 13 scenarios when it’s time to sell your mutual fund.
After all, you invested in mutual funds because you were confident it’d help you achieve your financial objectives. So, you shouldn’t be quick to make a selling decision. However, if you weigh the upsides and downsides of your instrument’s performance and strategy, and are still not content, redeem your fund.
Also, if you have achieved your financial goals or have found better-performing instruments, it’s time to cash out your fund.
