When Should You Sell a Mutual Fund? Key Factors to Consider

Investors often wonder when to sell a mutual fund investment. While it is difficult to pinpoint the best time to redeem your investment, you should consider selling if your mutual fund investment is yielding lower returns than expected over a prolonged period of three years or more. Consider comparing the fund against benchmarks and peers to accurately evaluate the fund’s performance.

In this article, we discuss how you can decide when to sell a mutual fund, factors to consider before redeeming your investment, and how to sell your mutual fund units. 

Every mutual fund investment guide emphasises the importance of starting early. However, the guidance is rather bleak when it comes to when to sell a mutual fund. Therefore, most investors are left wondering when the best time to sell their mutual fund investments is. Understanding why you should sell your mutual fund units can help you discern the right time to sell your investment. Poor fund performance over extended durations, change in the fund’s strategy or management, need for portfolio rebalancing, achievement of your set objectives, and high expenses and fees are some of the most common reasons why investors sell their mutual fund units. For instance, if the mutual fund is yielding lower returns than anticipated, you may be tempted to sell your units and invest in a different mutual fund scheme. It is advisable to carefully consider the reason for selling your units.

• As an investor, you should be aware of the pros and cons of redeeming your mutual fund units.
• Cashing out on your mutual fund investments makes sense when you have fulfilled your investment objective, there is a change in your investment strategy, the fund has underperformed, or you need immediate cash.
• You should factor in back-end loads and tax repercussions when deciding on when to sell your mutual fund units. 

Like all other investors, you must have wondered if you should sell your mutual fund units when the market is high. When markets are high, the allure of locking in profits can tempt you to sell your units. However, acting on this impulse may not be a wise choice. Similarly, panic selling may prompt you to sell and cut your losses when markets are low. This, too, can be detrimental from a long-term perspective since markets tend to rebound over time.  

Here’s a list of scenarios when you should actually consider selling your mutual fund units:

You’ve achieved your financial objective

Most investors start investing in mutual funds with the desire to meet specific financial goals and objectives. For instance, you may have invested in a short-term debt fund with the objective of funding a foreign trip. If you have hit your target in 2 years instead of 3, you can redeem your units and cash out your investment.

The fund is not performing well

The mutual fund scheme's performance plays a crucial role in determining when to sell the mutual fund. If the fund you’ve invested in is consistently underperforming, you should consider selling your units and investing in a different fund. Before you exit the fund, compare its performance against its peers over an extended period, say 3 years or more, to ensure that the fund is really performing poorly. It is also important to assess the performance of the fund over an extended time horizon. If the fund’s returns have been below par for a period of less than a year, it may be experiencing short-term fluctuations. However, if the fund has been consistently underperforming for the last 2 years or more, it's best to sell your investment.

You require the funds

While remaining prepared for emergencies is crucial, no one can accurately predict them. One of the chief benefits of investing in mutual funds is that your investment remains liquid and easily accessible. In other words, you can redeem your mutual fund units at any time to meet emergency expenses like unanticipated medical bills or job loss. In such instances, you don’t need to think about when to sell mutual funds; instead, you need to redeem your units to finance your needs.

You are changing your investment strategies

Every mutual fund investor has an investment strategy in place to help guide them through the fund selection process. Your investment strategy and approach evolve as the years go by. For instance, you may be more willing to take on risks for higher returns in your twenties, but in your thirties, you may be more comfortable with a balanced approach. It’s important that your investment portfolio reflects your core investment strategy. Therefore, if your investment approach has changed since you started, you may want to sell your mutual fund units and invest in new funds that better align with your new strategy.

If you’re deciding when to sell your mutual fund investments, remember to take the following factors into consideration, as they can impact your total returns:

Back-end loads

If you’re selling a mutual fund that has a back-end load, the total return you receive upon redeeming your units will be affected. Back-end loads are the fees payable by the investor when they decide to sell their mutual fund units. It is charged as a certain percentage of the fund’s shares. For most mutual fund schemes, the back-end load tends to be higher if you redeem your units earlier. This fee typically decreases over time. Therefore, if you own a fund with a back-end load, factor in the fee before deciding when to sell the mutual fund.

Tax repercussions

The capital gains earned on your investment are taxed depending on when you sell your mutual fund units. In simple words, the type of capital gains tax levied on your mutual fund investment depends on its holding period. For instance, if you redeem your investment in equity mutual funds in less than a year, a short-term capital gains tax of 20% will be applicable. However, if you redeem your investment after a year, a 12.5% long-term capital gains tax will be levied on the same investment. Additionally, if your gains are less than Rs. 1.25 lakhs in a year, no LTCG will be applicable. Generally, STCG tax rates tend to be higher than LTCG tax rates. You can use our mutual fund calculator tool to estimate your returns and factor in taxes to understand when to sell your mutual funds

Once you’ve decided on when to sell your mutual funds, you can sell them in one of the following ways:

Through the AMC

Just like you can invest in mutual funds directly through an AMC or Asset Management Company, you can also redeem your units directly through AMCs. If you’ve purchased mutual funds through an AMC, you can log into their online portal or app and select the mutual fund and the specific number of units you wish to redeem. You can review the redemption request and submit the form online. Once it is processed, the redemption amount will be credited to the linked bank account via an electronic transfer. Alternatively, you can visit the closest AMC branch office to place an offline redemption request. Since online redemptions are generally faster and easier, they are preferred by most investors.

Through a Demat or trading account

If you have purchased mutual funds through your Demat account or a trading account, you can use the same account to redeem your investment. You can log into the account and submit your redemption request online. Once processed, the amount will be credited to the bank account linked with your Demat account via NEFT or IMPS.

Through a third-party agent

If you have invested in mutual funds through a third-party agent or distributor, you can redeem your units through the same agent. All mutual fund distributors provide investors with a web-based portal or mobile app to simplify investment, portfolio management, and redemption. You can use this portal or app to redeem your units. However, you should note that there may be a nominal liquidation fee associated with this service. 

Deciding when to sell a mutual fund requires considerable deliberation and strategic thinking. Impulsively deciding to sell mutual funds when the market is high can result in losing out on better gains, while panic selling can jeopardise long-term wealth accumulation. Selling mutual fund investments makes sense when the fund is underperforming, you need immediate cash, your investment approach has evolved, or you have simply met your goals. However, it is important to consider the fees and taxation costs associated with redemption to make an informed choice. Before you make impulsive sell calls, always remember that mutual funds perform better over a long-term horizon.  If you’re unsure when to sell your mutual funds, consult an experienced financial advisor.

Are you looking for a mutual fund platform that makes redeeming funds as easy as investing in them? Choose the Bajaj Finance Mutual Fund Platform. This smart and easy-to-use platform lets you invest in mutual funds with a few easy clicks, compare mutual funds, and curate a portfolio that aligns with your goals and objectives. Here, you can easily start SIP investments with as little as Rs. 100. You can also enjoy a smooth and easy redemption process to liquidate your investment whenever needed!