When to Sell a Mutual Fund

Thorough research can help investors identify the proper timing to sell a mutual fund investment. Generally, when investment goals and constraints change, it may be appropriate to rebalance or rearrange a portfolio. As people get older, asset allocation gradually shifts from equities to bonds because bonds offer lower risk on a short-term horizon.

Besides, one good sign that can trigger quick selling is when short-term performance is disappointing. This can lead investors to quickly switch from one fund to another. However, selling one fund and buying another may considerably increase load fees and generate tax obligations. Investors should be aware of any tax obligations that are subject on increases in the net asset value of shares. If the shares have been purchased some time ago, a decision to sell should be supported by minor capital gains tax on the difference between the purchase price and the selling price. Disappointing current performance of a fund that has performed well over a long period of time may require large capital gain tax if the shares are sold.

Having this in mind, investors may be enticed to sell in the following cases:

The fund is becoming too large: mutual funds offer the great advantage of diversification that offers investors ownership of hundreds of securities from several companies for a small amount of money while reducing significantly the risk of monetary losses. However, diversifying across too many actively managed funds will most likely lead to high costs of active management. A fund that is growing too large or too rapidly may indicate inferior future performance. Generally, it is difficult to continuously invest successfully large cash infusions.

The fund considerably underperforms similar funds : when a mutual fund underperforms similar funds for a period of three years of more, considering selling it is a wise investment decision. However, investors should compare similar funds. For instance, small-cap funds cannot be compared to funds of S&P 500.

The fund manager changes the investment strategy : there are cases that fund managers change their investment strategy and stick to past investment patterns. This may the sign of a fund manager in a panic attack. Generally, successful fund managers keep their investment style in spite of altering market conditions. Markets make their circles and although value-oriented funds underperform in the beginning of the recession, in the end they are winners. Therefore, fund managers who are firm in their investment strategy, are favored in the long run even if they are cyclically out of favor.

The fund manager changes and the new fund manager lacks a successful run: when a portfolio manager leaves, the investment company seeks to replace him/her with a new one that has an attractive track record. If a fund manager is replaced by a new one, who is unknown or quite unsuccessful, an investor may be tempted to reduce or close their positions in the mutual fund. Typically, the Securities and Exchange Commission requires mutual funds to identify their managers in their prospectus, but in cases that investment decisions are made by committee, a fund manager may not be named. The only case that investors should not bail out of their funds is if the fund manager is being replaced due to poor performance.

Overall, circumstances differ between investors and over time. There are specific cases that investors may sell their funds and definitely such a decision should not be taken impulsively. On the contrary, it requires a great deal of thought and consideration. An investor should balance all the above mentioned signals with his/her investment objectives and decide if the timing is appropriate to sell a mutual fund.