When should you sell your mutual fund investments? Experts weigh in.

Mint spoke to financial experts to help answer this critical question.

When you’ve met your goal

One of the most straightforward reasons to sell your mutual fund investments is that you have achieved your financial goal. Vishal Dhawan, a Sebi-registered investment advisor and founder & CEO of Plan Ahead Wealth Advisors, said it’s prudent to sell your mutual fund investments once your financial objective has been met.

Some investors take a goal-based approach to financial planning, in which they sell their mutual funds and shift the money to safer instruments at least two to three years before a significant financial goal is due. “This strategy protects the investor’s gains in case of the equity market crashes just before the goal is achieved,” said Abhishek Kumar, a Sebi-registered investment advisor and founder & chief investment advisor at Sahaj Money.

For tax gain and loss harvesting

Vishal Dhawan said investors can also sell their mutual funds for specific tax strategies such as tax gain and loss harvesting. If you’re nearing the ₹1.25 lakh annual tax-free gains limit on equity mutual funds, selling to realise those gains can be a smart move. Similarly, selling a fund at a loss can help offset gains from other investments and reduce your tax bill.

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For some investors with global exposure, US tax rules pose unique challenges. Dhawan said US-based investors may need to sell mutual funds that become passive foreign investment companies (PFICs) to avoid unfavourable tax implications.

For underperformance

Consistent underperformance may be a sign that it’s time to move on from a particular fund. Dhawan said a fund must lag its benchmark or the investor’s expectations for at least three years to be considered an underperformer.

“An underperforming fund may bounce back when the market environment changes, such as with upcoming rate cuts.”

However, not all short-term underperformance requires immediate action. Nishant Batra explained that funds that follow a particular investment style may underperform temporarily, particularly during market downturns. “Such a fund may bounce back when the market environment changes, such as with upcoming rate cuts,” he said. Therefore, it’s essential to distinguish between temporary dips and structural underperformance caused by poor investment strategies or fund management.

When the fund manager changes

Investors often wonder whether to sell when the manager – or the investment strategy – of a mutual fund changes. Abhishek Kumar cautioned, however, that it’s important not to act in haste. “We don’t focus too much on individual fund managers but look for consistency in the fund’s performance and adherence to the investment philosophy,” he said, adding, “We emphasise the importance of qualitative analysis, in addition to quantitative data, to ensure the fund manager’s actions align with the fund’s stated investment strategy and goals.”

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However, Nishant Batra, co-founder of Holistic Prime Wealth Private Limited, a mutual fund distributor, suggested re-evaluating your position if the scheme’s characteristics change significantly. For example, if a large-cap fund turned into a large-and-mid-cap fund, it may no longer align with your investment goals. Batra also cited the potential retirement of renowned fund managers such as Rajeev Thakkar and S Naren, saying, “It’s important to thoroughly evaluate the credentials and style of the new manager before making a decision in such cases.”

According to Batra, if a mutual fund seems to be underperforming, it’s important to compare its performance to other funds with the same investment style to understand the cause. For instance, growth funds may have underperformed recently due to rate hikes, as growth stocks typically lag value stocks when interest rates are high. However, this underperformance could reverse when market conditions shift, such as with the upcoming rate cuts. Batra said temporary underperformance owing to external factors may not justify selling, but structural issues related to the fund manager or investment style could be a reason to exit a fund.

Selling debt funds

There are other red flags to watch out for when selling debt mutual funds. Nishant Batra said a decline in assets under management (AUM) can indicate stress within the fund’s portfolio, as seen with the Franklin Templeton funds crisis. Increased concentration in a particular security or group could also be a reason to exit a fund to avoid undue risk.

Rebalance without selling

Over time, the weight of different asset classes in your portfolio may shift due to market fluctuations. Kumar advised monitoring your portfolio’s asset allocation periodically to ensure it remains in line with your goals and risk appetite. If the allocation shifts significantly, re-structuring your portfolio may be necessary to restore balance.

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Instead of selling funds to achieve this, Kumar suggested alternative methods such as redirecting future instalments into underweight asset classes.

Final thoughts

The question of when to sell your mutual fund investments has no straightforward answer, and depends on your circumstances and risk profile. It’s advisable to take a holistic and nuanced view of your investments before deciding to sell.

Whether driven by financial goals, tax considerations, underperformance, or changes in fund strategy, your decision to sell should be well-informed and align with your broader financial plan.