When's the right time to kiss your mutual fund goodbye?

Almost all of us have heard the saying, 'The best time to invest was yesterday; the second best time is today.' However, there is no popular saying about when to sell. Little attention is given to this pivotal question, as the whole point of investing is to sell well.

Many investors act on their emotions. They feel tempted to sell when their investment zooms in a short period. The allure of 'locking in profits' can be strong, but acting on this impulse may not always be wise. Conversely, a sudden market downturn can spur panic selling among investors. Remember the 2008 financial crisis? Investors who sold in panic suffered losses of 50-60 per cent. Selling in fear often leads to regret as markets typically rebound over time.

So, in this article, we will reveal a few scenarios in which you should actually consider selling your mutual fund.

Five valid reasons to sell your mutual fund

1. Goal achievement
If you've hit your financial target sooner than expected—say, saving for a car in two and a half years instead of five—go ahead and cash out. There's no better reason to celebrate your success than achieving your goal early.

2. Changed circumstances
Life happens, and a medical or a financial emergency may rear its ugly head. Or, sometimes, your financial needs change. If you suddenly need money and have exhausted all your cash reserves, you have no option but to sell your fund.

3. Rebalancing your portfolio
When investing in mutual funds, we typically decide the ratio between equity and debt, which is called asset allocation. For example, you might allocate 60 per cent of your portfolio to equity funds and 40 per cent to debt funds.

Say the market rises, and your equity funds grow to 80 per cent of your portfolio. Now, your original ratio is skewed in favour of equity.

To restore balance, you sell part of your equity funds (20 per cent in this case) and invest that amount in debt funds. This rebalancing brings your portfolio back to the original 60:40 equity-debt allocation. That's another reason to sell your mutual funds.

4. Fund underperformance
If you initially choose a fund that you believed to be promising but it fails to meet expectations, then it is time to reassess. However, ensure your fund is genuinely performing poorly. The way to do that is to compare its performance with its peers.

If a fund consistently underperforms its peers for an extended period, say three years or more, it might be best to exit that mutual fund. Avoid rash decisions based on short-term fluctuations in performance, like the last six months or a year. A longer-term view gives a more accurate understanding of how a fund performs in various market conditions.

5. Change in the fund's DNA
If a fund changes its investment mandate—say, it turns from a small-cap fund to a large-cap fund—it might no longer align with your strategy. In such a case, the wise thing to do is to reassess whether it still fits your portfolio. If it doesn't, bid goodbye to that mutual fund.

When to be watchful and not sell

Change in fund manager
A new fund manager doesn't trigger an immediate sell signal. The fund's robust processes might continue delivering good returns. A lot of times, the fund manager moves internally within the AMC (asset management company). In this scenario, you can expect the fund strategy to continue.

However, if the fund manager leaves the AMC, that could be concerning news.

On the other hand, it is also true that for some funds, a change in the fund manager can change its fortunes in a positive manner. The new manager brings their own strategy, philosophy, and investment principles, which can prove helpful. That said, if the new manager's strategy is a drag on the fund, it could be a reason to reconsider.

Change in AMC ownership
A change in the AMC ownership can be more complex. If an existing fund house merges with another, it might affect investment strategies and team continuity. New entrants acquiring an AMC usually cause less disruption.

Typically, the impact of these changes becomes apparent after a few months. A prudent approach is to observe the fund's performance post-transition before making a decision.

An out-of-favour investment style
It happens at times that a particular investment style falls out of favour. For example, over the last couple of years, growth funds have been lagging behind value funds. In such a case, any fund that follows the growth style of investing will likely underperform.

But it is important to note that investment styles, like everything else, have ups and downs. They experience both favourable and challenging phases. This should not be a standalone reason to exit a fund. The best option would be to observe the fund's performance over a longer period.

The bottom line

Never sell your mutual fund out of fear or impulse.

Investing is a marathon, not a sprint. Avoid hasty decisions and don't let your emotions take over. Make informed decisions and keep your eyes on the prize.

Your portfolio—and your future self—will thank you.

Also read: Six questions to ask before selling your mutual fund