When to Sell a Mutual Fund (2024)

If your mutual fund is yielding a lower return than you anticipated, you may be tempted to cash in your fund units and invest your money elsewhere. The rate of return of other funds may look enticing, but be careful; there are both pros and cons to the redemption of your mutual fund shares. Let's examine the circ*mstances in which liquidation of your fund units would be most optimal and when it may have negative consequences.

Key Takeaways

  • When it comes to redeeming mutual fund shares, investors should be mindful of the pros and cons of doing so.
  • Tax consequences and back-end loads demand utmost consideration when investors contemplate the prospect of cashing in their mutual fund units.
  • Some times are more appropriate than others, for cashing out of a mutual fund. Topping the list are the following scenarios:
  1. When there's been a change of fund manager(s)
  2. When there's been a change to a fund's investment strategy
  3. When a fund has consistently underperformed
  4. When a fund grows too big to meet an investors goals

Mutual Funds Are Not Stocks

The first thing you need to understand is that mutual funds are not synonymous with stocks. So, a decline in the stock market does not necessarily mean that it is time to sell the fund. Stocks are single entities with rates of return associated with what the market will bear. Stocks are driven by the "buy low, sell high" rationale, which explains why, in a falling stock market, many investors panic and quickly dump all of their stock-oriented assets.

Mutual funds are not singular entities; they are portfolios of financial instruments, such as stocks and bonds, chosen by a portfolio or fund manager in accordance with the fund's strategy. An advantage of this portfolio of assets is diversification.

There are many types of mutual funds, and their degrees of diversification vary. Sector funds, for instance, will have the least diversification, while balanced funds will have the most. Within all mutual funds, however, the decline of one or a few of the stocks can be offset by other assets within the portfolio that are either holding steady or increasing in value.

Because mutual funds are diversified portfolios rather than single entities, relying only on market timing to sell your fund may be a useless strategy since a fund's portfolio may represent different kinds of markets. Also, because mutual funds are geared toward long-term returns, a rate of return that is lower than anticipated during the first year is not necessarily a sign to sell.

Relying only on market timing to sell your fund may be a useless strategy since a mutual fund's portfolio may represent different kinds of markets.

When Selling Your Fund

When you are cashing in your mutual fund units, there are a couple of factors to consider that may affect your return:

Back-End Loads

If you are an investor who holds a fund that charges a back-end load, the total you receive when redeeming your units will be affected. Front-end loads, on the other hand, are sales fees charged when you first invest your money into the fund. So, if you had a front-end sales charge of 2%, your initial investment would have been reduced by 2%.

If your fund has a back-end load, charges will be deducted from your total redemption value. For many funds, back-end loads tend to be higher when you liquidate your units earlier rather than later, so you need to determine if liquidating your units now is optimal.

Tax Consequences

If your mutual fund has realized significant capital gains in the past, you may be subject to capital gains taxes if the fund is held within a taxable account. The cost basis you choose can impact your bottom-line capital gains and losses. When you redeem units of a fund that has a value greater than the total cost, you will have a taxable gain.

Note that while you may not have sold your mutual fund shares, the fund's portfolio may have undergone taxable events that you may be responsible for paying your share of. For instance, if a portfolio manager sells holdings in the fund for short-term capital gains.

For many funds, back-end loads tend to be higher when you liquidate your units earlier rather than later, so you need to determine if liquidating your units now is optimal.

When Your Fund Changes

Do keep in mind that even if your fund is geared to yielding long-term rates of returns, that does not mean you have to hold onto the fund through thick and thin. The purpose of a mutual fund is to increase your investment over time, not to demonstrate your loyalty to a particular sector or group of assets or a specific fund manager. To paraphrase Kenny Rogers, the key to successful mutual fund investing is "knowing when to hold 'em and knowing when to fold 'em."

The following four situations are not necessarily indications that you should fold, but they are situations that should raise a red flag:

Change in a Fund's Manager

When you put your money into a fund, you are putting a certain amount of trust into the fund manager's expertise and knowledge, which you hope will lead to an outstanding return on an investment that suits your investment goals. If your quarterly or annual report indicates that your fund has a new manager, pay attention. If the fund mimics a certain index or benchmark, it may be less of a worry as these funds tend to be less actively managed.

For other funds, the prospectus should indicate the reason for the change in manager. If the prospectus states that the fund's goal will remain the same, it may be a good idea to watch the fund's returns over the next year. For further peace of mind, you could also research the new manager's previous experience and performance.

Change in Strategy

If you researched your fund before investing in it, you most likely invested in a fund that accurately reflects your financial goals. If your fund manager suddenly starts to invest in financial instruments that do not reflect the mutual fund's original goals, you may want to re-evaluate the fund you are holding.

For example, if your small-cap fund starts investing in a few medium or large-cap stocks, the risk and direction of the fund may change. Note that funds are typically required to notify shareholders of any changes to the original prospectus.

Additionally, some funds may change their names to attract more customers, and when a mutual fund changes its name, sometimes its strategies also change. Remember, you should be comfortable with the direction of the fund, so if changes bother you, get rid of it.

Consistent Underperformance

This can be tricky since the definition of "underperformance" differs from investor to investor. If the mutual fund returns have been poor over a period of less than a year, liquidating your holdings in the portfolio may not be the best idea since the mutual fund may simply be experiencing some short-term fluctuations.

However, if you have noticed significantly poor performance over the last two or more years, it may be time to cut your losses and move on. To help your decision, compare the fund's performance to a suitable benchmark or to similar funds. Exceptionally poor comparative performance should be a signal to sell the fund.

The Fund Becomes Too Big

In many cases, a fund's quick growth can hinder performance. The bigger the fund, the harder it is for a portfolio to move assets effectively. Note that fund size usually becomes more of an issue for focused funds or small-cap funds, which either deal with a smaller number of shares or invest in stock that has low volume and liquidity.

When Your Personal Investment Portfolio Changes

Besides changes in the mutual fund itself, other changes in your personal portfolio may require you to redeem your mutual fund units and transfer your money into a more suitable portfolio. Here are two reasons which might prompt you to liquidate your mutual fund units:

Portfolio rebalancing

If you have a set asset allocation model to which you would like to adhere, you may need to rebalance your holdings at the end of the year in order to return your portfolio back to its original state. In these cases, you may need to sell or even purchase more of a fund within your portfolio to bring your portfolio back to its original equilibrium.

You may also have to think about rebalancing if your investment goals change. For instance, if you decide to change your growth strategy to one that provides steady income, your current holdings in growth funds may no longer be appropriate.


If your fund has suffered significant capital losses and you need a tax break to offset realized capital gains of your other investments, you may want to redeem your mutual fund units in order to apply the capital loss to your capital gains.

The Bottom Line

Selling a mutual fund isn't something you do impulsively. It's important to give the decision to liquidate your mutual fund a great deal of thought. Remember that you originally invested in your mutual fund because you were confident in it, so make sure you are clear on your reasons for letting it go. However, if you have carefully considered all the pros and cons of your fund's performance and you still think you should sell it, do it and don't look back.

When to Sell a Mutual Fund (2024)


When to Sell a Mutual Fund? ›

If your fund has suffered significant capital losses and you need a tax break to offset realized capital gains of your other investments, you may want to redeem your mutual fund units in order to apply the capital loss to your capital gains.

When should you sell a mutual fund? ›

After your financial goals are realized you might want to sell higher risk stock or alternative mutual funds and invest in lower-risk fixed income and cash assets. That will preserve your capital and remove the volatility that higher risk assets contribute to a portfolio.

How to sell mutual funds interview questions? ›

We have asked professionals to share the job interview experience as a Mutual Funds Analyst and here we got some most asked Interview questions.
  1. 1 Explain what do you mean by private equity transactions? ...
  2. 2 Explain what is equity funding? ...
  3. 3 Explain what is weighted average rating factor? ...
  4. 4 Explain what is call option?

When should you cash out a mutual fund? ›

You may want to sell a mutual fund if it is massively outperforming its benchmark. Other reasons to sell include "style drift," you need to rebalance your portfolio or your risk tolerance has changed. The final reason to sell mutual funds is if there are cheaper options available.

When should you sell your investment? ›

Investors might sell a stock if it's determined that other opportunities can earn a greater return. If an investor holds onto an underperforming stock or is lagging the overall market, it may be time to sell that stock and put the money to work in another investment.

What is the best way to sell mutual funds? ›

Selling mutual fund shares

Mutual fund shares are sold the same way that they're bought: either through the fund company directly or through your broker. You'll receive the next available net asset value as your price for each share sold. You'll also have to pay any applicable fees or charges.

Should I sell mutual funds when market is low? ›

The next thing you need to keep in mind is that just because the market is down does not mean that you should bail out of your investments. If you sell your mutual funds when the market is down, you will lose money.

Can I sell mutual funds whenever I want? ›

You can enter an order to buy or sell mutual fund shares at any time, but your trade won't be executed until the closing of the current trading session or the next trading session if you place your order after hours.

How to sell mutual fund to client? ›

Providing the information in these tips will help you sell mutual funds to even the most skeptical of clients.
  1. Desired Income Investment Funds. ...
  2. Access to high-value assets. ...
  3. Affordability and liquidity. ...
  4. Professional management. ...
  5. Co-financing for easy return. ...
  6. Investment funds and tax strategy. ...
  7. Disadvantages of Fee.

How to sell regular mutual funds? ›

Methods To Exit From Mutual Funds
  1. Through Trading Account or Demat. If we had bought mutual fund units from our DEMAT or trading account via a broker, we would need to raise a sell order through the same broker. ...
  2. Directly via AMC Or Distributors. ...
  3. Registrar or Transfer Agencies (RTAs)
Dec 8, 2023

When should you exit a mutual fund? ›

If a fund consistently underperforms over multiple periods and fails to deliver satisfactory returns, consider exiting the investment. Research and select funds with a similar investment objective but better track records and performance history to redirect your investments.

Should I sell mutual funds before a recession? ›

Sell or Stay the Course in a Recession

Mutual funds are known as a type of investment to buy and hold, so it's standard practice to not sell your mutual fund during a bear market.

What is the 30 day rule on mutual funds? ›

The 30-day rule for mutual funds prevents you from claiming a tax loss if you buy the same or a similar fund within 30 days before or after selling it.

What is the 3-5-7 rule in trading? ›

The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.

When should you cash out investments? ›

When to Sell Stocks — for Profit or Loss
  1. Your investment thesis has changed. The reasons why you bought a stock may no longer apply. ...
  2. The company is being acquired. ...
  3. You need the money or soon will. ...
  4. You need to rebalance your portfolio. ...
  5. You identify opportunities to better invest your money elsewhere.
Nov 13, 2023

At what percent return should I sell? ›

When a stock is going the right direction, your decision making is not as easy. How long should you hold? Here's a specific rule to help boost your prospects for long-term stock investing success: Once your stock has broken out, take most of your profits when they reach 20% to 25%.

How long should you hold a mutual fund? ›

Given the higher level of risk, they offer the potential for greater returns over time. The time frame for holding this type of mutual fund should be five years or more. Growth and capital appreciation funds generally do not pay any dividends.

Do I have to pay taxes if I sell my mutual funds? ›

The funds report distributions to shareholders on IRS Form 1099-DIV after the end of each calendar year. For any time during the year you bought or sold shares in a mutual fund, you must report the transaction on your tax return and pay tax on any gains and dividends.

What is the time for selling mutual funds? ›

As discussed before, the cut off time for most mutual funds is 3.00 PM. Hence, you must submit your application and successfully transfer your funds before 3.00 PM to get that day's NAV. If the application or the fund is transferred late, your application will still be accepted, but you will get the next day's NAV.


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