When Is The Best Time To Sell Your Mutual Fund?
Nov 22, 2017

Author: PersonalFN Content & Research Team

Time profit lossThe market seems to have maxed out and you are contemplating on selling your equity mutual funds. But, is now the best time to sell? The same question may have crossed your mind a few months ago.

Had you jumped the gun a few months earlier, you would have lost out additional returns of nearly 10%.

Over the past eight months, the S&P BSE Sensex has set newer all-time highs almost consecutively every month. But the market scaling to higher peaks has not dithered retail investors. In the same period, the net inflows from retail investors totalled as much as Rs 1.05 lakh crore into equity schemes (including Equity Linked Savings Schemes).

Investors purchased Rs 2.25 lakh crore of mutual fund units against redemptions amounting to a mere Rs 1.20 lakh crore. However, the redemptions may not be a complete exit from equity funds as some may have switched from one equity scheme to another.

The data suggests that a majority of the investors are riding the bull market rally. Yes, those who have been fearless and have invested despite the market hitting all-time highs are sitting on higher returns.

The ones who expressed caution and redeemed their investments. If this was solely as a strategy to time the market, they are sitting on lower returns.

time investmentThere could be several reasons why you would want to sell your mutual fund units. But, you need to have sound reasoning behind your decision. Selling your mutual fund units based on market direction is imprudent and it could lead to suboptimal returns.

PersonalFN has often highlighted in the past that every investor should adopt a prudent and planned approach to investing. You need to avoid ad hoc investment decisions, either to buy or sell mutual fund units.

While market levels define the value of your investment, due to volatility, the value will always fluctuate. By solely looking at market movements, it is difficult to pick the best time to sell, as the market may move higher or lower over the short term.

Hence, the best time to sell your mutual fund investments is when:

  1. You have met your financial goal 

    This is the primary reason why you should sell your mutual funds. If your equity funds delivered better than expected returns, you may end up reaching your goal before the target date.  On meeting your goal before the target date, you can redeem your equity mutual fund units and put it in low risk assets such as liquid funds. This will retain the value of the portfolio until the time you need to withdraw it to fund the goal.

    If you have not set financial goals, here’s how to do it:

    You may also need to dip into your mutual fund portfolio when there is an emergency. At such times, it would be prudent to redeem funds from low risk assets first, such as liquid fund and short-term debt funds, before moving on to riskier equity funds. Because during an emergency if equity markets are at a low, you may end up withdrawing at low returns and miss the potential of higher returns in the future.
  2. You need to rebalance your portfolio 

    You may have set an asset allocation based on your risk profile, investment objective, and time horizon.

    Let’s say you maintain a 70:30 (equity:debt) portfolio. Over the quarter or half-year, your equity funds run up considerably. This may skew your asset allocation and your portfolio may have an equity weightage of over 80%. This is when you may need to redeem the investment and reinvest in debt. Conversely, if equity markets don’t perform as expected, you may need to move from debt to equity to meet the targeted asset allocation. You may also need to alter your asset allocation as your goal draws nearer. As the target date of your financial goal approaches, you may need to switch from riskier assets to low risk assets.

    To chart an Ideal Asset allocation for your financial goals, view this short video:

    Similarly, if there is a change in your risk tolerance, you may need to sell and reinvest your mutual fund investments to meet the desired asset allocation. Growing older diminishes your risk tolerance , hence, you may consider shifting from high risk to low risk assets.
  3. Your mutual fund scheme underperforms

    We all make mistakes. Your mutual fund investment may not live up to your expectations because either you made a mistake to start with or a genuinely good mutual fund started deteriorating in performance. 

    At times, even a carefully selected mutual fund may underperform. The fund manager’s investment bets may have not yielded the best returns. You need to review the performance before dumping the mutual fund scheme. To get your portfolio back on track, you may need to sell your funds and invest in better-performing, diversified equity funds.

    Returns of market-linked investments are volatile and may not always give you the returns you expected. So instead, compare the returns of the scheme to its benchmark and other peers in the category. Continue to hold on to a scheme, if the performance fared comparatively well. However, if the scheme has underperformed compared to its peers and the benchmark , it may be indicative of an underlying investment issue, and you could sell your units. 

    Here’s a short video to analyse the risk-return and performance of mutual funds:

  4. There is a change in the fundamental attributes or investment objective of the scheme

    The mutual fund industry is under constant change. As seen recently, the regular mandated proper categorisation of mutual fund schemes. Only one scheme is allowed per category. Hence, to meet these guidelines, the fund house may need to alter the schemes investment objective or merge the scheme with others. Such amendments may induce you to sell. However, before doing so, you need to judge the long-term impact.

    At times, a change in fundamental attributes may rarely necessitate any action. For example, after the regulator allowed mutual funds to invest in Real Estate Investment Trusts (REITs), certain schemes altered the asset allocation mandate such that it specifies an allocation to REITs as well. However, this amendment just provides an enabling power to the fund and may not necessarily translate into investments in REITs.

    But if the fund is moving from an aggressive asset allocation strategy to a conservative one or vice-versa, this is a reason to worry. This happens mostly with scheme mergers. In such cases, you need to review if the revised asset allocation or investment strategy meets your risk profile and investment objective. You can always seek the assistance of a financial planner in such cases.

    A change in fund manager, too, needs to be examined carefully. However, you should note that the investment process involves an entire team. Therefore, if a fund manager quits, the investment team may be equally competent to meet the investment objective of the scheme. Therefore, you should give the new fund management time. If after a few quarters or more, the performance of the scheme fails to live up to its performance mark, sell it.
  5. You find a better alternative

    You may have started your journey with mutual funds through tax-savings schemes such as Equity Linked Savings Schemes (ELSSs). However, now that the three-year lock-in period is over, you are unsure whether to hold  or redeem it. While some tax-saving schemes have turned out to be top performers, giving open-ended equity diversified schemes a run for their money, most other schemes have fallen short (even though they may rank among the top in the ELSS category). Thus, you may consider switching your investment in an ELSS to better performing equity diversified schemes.

    In the same way, if you can bear the additional risk, you may want to sell your investments in a balanced fund to reinvest in a large-cap fund or even a mid-cap fund based on the long-term wealth creation potential of such schemes. 

The market constantly goes through short-term phases of euphoria or panic. But historical data shows, over the long term, it has always moved up. This is why you need to base your buying and selling decisions not on the whims and fancies of the market, but on your financial requirement, your goals, and the underlying performance of the scheme.

Sell your mutual fund units only if your reasons include the five highlighted above.

Buying and selling mutual funds employs a complex decision-making process. This may be extremely tedious and time consuming for the average saver. It would be advisable to seek the assistance of Certified Financial Guardian. These are professional and ethical financial advisors who will take care of your hard-earned money and investments like they would their own.

The best route to allocate your funds is to invest in mutual funds through Systematic Investment Plan.

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