Investors generally tend to research thoroughly when they start investing in a mutual fund (MF). However, decisions regarding selling of their MF units usually happens in a haphazard manner. Here is a lowdown on when an investor can sell his/her investments in MFs.

Consistent underperformance

Consistent underperformance might be one of the most natural reasons for an investor to sell holdings in a particular MF. An investor shouldn’t sell units just because a fund’s performance has been underwhelming in the recent past (say, for a few months). But an investor can sell a fund if it consistently underperforms its peers and benchmark for a long period (1-2 years) by a good margin. Further you can replace that underperforming fund by investing in 4-5 star rated MF in bl.portfolio Star Track MF Ratings in the same category.

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Target reached ahead of time

When the corpus you intended to accumulate is achieved well before the timelines you set for specific goals, you can sell units and move the amount to safer investments. This is especially critical for goals such as children’s higher education, their marriage and retirement as these are quite critical. One can start selling a year or two ahead of goal systematically especially when markets are good so that his/her corpus is protected from volatility and nasty corrections just before the goal is due. Further, the redemption proceeds can be invested in liquid funds or fixed deposits.

Portfolio rebalancing

Asset allocation and subsequent re-balancing are key elements in any investment plan as it ensures that you stay within risk tolerance limits by changing allocation among assets in line with your goals and investment objectives. Let’s say a portfolio mix for an investor is 60(equity):40(debt). There are times when equity MFs give spectacular returns in a very short time-frame leading to rise of equity component in the mix. Let’s consider a portfolio of ₹1 lakh with ₹60,000 in equity MFs and ₹40,000 in debt funds. In a year, if equity has given a return of around 60 per cent while the same for debt delivered 6 per cent, your portfolio allocation mix would have changed to 70:30.

In such a situation, you can sell a portion of your holdings of equity MF and invest proceeds in debt funds. It is also important to choose which MFs you can sell in such a situation. Here, you can decide to sell those MFs which can be either from the fund house, the concentration of which is high in your portfolio or such MFs on account of which your portfolio might be tilted towards a particular theme or sector. Further, you can set certain tolerance levels such as whenever equity portion of your portfolio rises to 65 or 70 per cent, you can start selling some MFs in order to rebalance. Along with rebalancing, this process can help you in reviewing period performance of MFs, booking profits and reduce concentration risk of your portfolio.

Other reasons

Many times, investors may have thematic or sectoral funds in order to make opportunistic gains. However, after a bull run, a sector/theme may go out of favour due to change in fundamentals. For instance, IT stocks have been under pressure in recent times on account of rising Fed rates and fear of recession in Europe and the US. In such cases, it is better for investors to book profits in such sectoral/thematic funds if change in fundamentals may expose such funds to unknown risks, which investors aren’t ready to have in their portfolio.

Investors can also consider exiting MFs which have seen change in fundamental attributes which might not be suitable with their risk appetite. For instance, in 2018, SEBI came up with categorisation rules which led to changes in investment style, scheme construct and portfolio allocation. If such changes lead to MFs not being aligned with your investment objective and risk appetite, you can choose to exit the fund. Investors should also consider the impact of exit load and taxes before selling MFs.