When to Decide Selling a Mutual Fund

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

Mutual funds are portfolios of different stocks and bonds and chosen by a fund manager according to a strategy of these mutual funds, for example sector funds, index funds, balanced funds, country mutual funds etc. An advantage of selling mutual funds is diversification and is the most important reason why selling a mutual fund is different to selling stocks.

Many investors sell their stocks in a fallen stock market and panic is often the greatest reason in their decision. It is different in case of mutual funds because they often invest in different markets and a drop of the value of your mutual funds is not always a sign to sell your stock. Maybe it is the moment to invest more in your mutual fund.

However mutual funds are long-term investments and have 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 you can 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 invested 50% in mutual funds which invest in shares and 50% in stocks. After a few years your invested capital in mutual funds is increased but in not conform your investment strategy 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 now some mutual funds which invest in stocks until your investment strategy is back the same as you started.

YOUR ARE IN A DIFFERENT STAGE OF YOUR LIFE

If you become nearer to the age of retirement you can consider limiting your risk and choosing for a more defensive investment strategy. Maybe it is best to sell your aggressive mutual funds and buy more defensive ones.

AN EXXAGERATED RETURN IN A FEW MONTHS

It may happen if you invest in emerging markets you can reach a return of 50% or even 100% in 6 months or less; in this case you can consider selling your mutual fund for the security not losing your profit or you can sell the increase of your fund and keep your original invested money in this fund for a while. 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 now because your intention was totally different.

YOUR MUTUAL FUND IS UNDERPERFORMING

This is one of the reasons when 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 for selling these mutual funds and that you compare after several years and between mutual funds with a same strategy. It is possible your fund is underperforming compared with similar 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 daunting 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.