When to sell your mutual fund holding?

When it comes to investing in mutual funds, there are two elements to it - putting the money in the funds and withdrawing it later. Our 99% focus is only on the former aspect. No one talks about the latter. Investors must also understand when they can or should sell mutual fund holdings.

The mutual fund folio in May 2021 crossed the ten crore mark. In June 2022, the number of folios increased to 13.46 crore. Based on these numbers, it is obvious that the number of mutual fund investors is increasing. Therefore, we must educate them on every aspect of mutual fund investing. 

Why is it important to know - when to sell your mutual fund holdings? Once you know the answer to this question, you will have an answer to why to start your mutual fund investment journey and where to end it.

Reasons to sell mutual funds

Investors evaluate mutual funds on N factors before investing - NAV, expense ratio, returns, etc. Similarly, before selling a fund, they should consider multiple factors. Below are some reasons to sell your mutual funds:

Booking profit: One of the obvious reasons for selling your holdings is to book profits once you have achieved your financial goals. We all invest in the market to accomplish specific financial goals. For example, you invested in a fund for three years to accumulate Rs 8 lakh to buy a car. Once you have accumulated the desired corpus, you can exit your mutual fund investments.

Fund's objective changed: Assume you invested in a multi-cap fund because you wanted exposure to small, mid, and large-cap stocks. However, the fund shifted to being a large cap. You may not want to stay invested in the fund any longer as you already have investments in large-cap mutual funds. In such situations, you may exit the fund and reinvest the amount in a fund that matches your objectives.

Underperformance: Most investors are tempted to sell their mutual fund if it does not deliver good returns. Unlike the above points, this is tricky to implement. Selling underperforming funds is a good idea, but investors must evaluate the degree of underperformance and the timeframe. A fund may underperform for a brief period because of restructuring in the portfolio or any underlying stock not performing well.  

If possible, you should try to dig a bit deeper before selling it. If your fund has given you 15% for the past five years and for the past couple of quarters it has underperformed the benchmark, you should probably wait a bit longer before selling it. Also, when comparing returns, make sure you're comparing returns from the same fund category. Here is a rule of thumb, if a fund underperforms for two or more years, you may exit it. 

Asset allocation: Assume you invested in three mutual funds - small, mid, and large-cap. Your initial allocation was 20%, 30%, and 50%, respectively. The mid-cap fund generated exceptional returns, and its allocation changed to 50% of your portfolio, while the large-cap reduced to 30%. As an investor, you may not be comfortable with a high allocation in small and mid-cap funds. In such a situation, to maintain asset allocation, you may sell some of your mid-cap NAVs and invest the same in the large-cap fund.

Fund manager change: The change of a fund manager is not something that most investors track. Also, it is not a standalone parameter on which you should sell your mutual funds. An important thing to note is that a fund manager plays a vital role in a fund's success. If a fund is doing well and a fund manager is changed, you may want to know the reasons for the change. Also, try to find information on the new manager. Based on your findings, decide whether to sell a mutual fund or not.

Important points to consider while selling mutual funds

Whenever you plan to sell your mutual funds, please factor in the below points:

• Don't sell mutual funds because you have seen exceptional gains in a short time. In other words, don't try to time to market.
• Understand taxation when booking profits or selling NAVs. If you exceed the threshold limit of capital gains, you are liable to pay capital gain taxes. Bring taxation into computation while calculating your returns.
• Check if there are exit loads. It may affect your overall return when you redeem your units.

Before you go

Mutual funds are one of the better investment options that may offer good returns in the long term. When you decide to sell them, be 100% confident that you are selling them for the right reasons. If you are confused, it is always better to get an expert opinion rather than make a mistake.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.