Knowing When to Sell a Mutual Fund

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The motive of investing in Mutual funds will be different from person to person and hence a generic advice on when to sell a mutual fund may be somewhat difficult.  There could be several approaches on this subject.

Based on minimum expected ROI

A simple rule acceptable to most investors will be to set a benchmark on how much of Return On Investment (ROI) in a mutual fund is satisfactory over a specific period of time. If that benchmark is not obtained in the specific period of holding the mutual fund, it can be sold.

For example, an investor may want “at least 4 percent more annual returns on investment” than another much safer and secured form of investment available, over a period of, say, 2 years.  If the income in the form of dividends and the appreciation of the invested units is less than this benchmark over a period of 2 years, the investor may opt to sell the mutual fund.

Based on minimum lock-in period for Tax benefit

In India, certain forms of Mutual fund investments are exempted from Income tax subject to certain limits on amount and lock-in period (about 3 years). Those who invest on such mutual funds, not with any capital gain in mind but with the tax saving in mind, may sell the mutual fund once the lock-in period is over, irrespective of income from the fund, just to get back their cash liquidity.

Pre dividend or post dividend

Some investors may opt to sell the fund before dividends are declared, to avail the benefit of higher unit price. Some Investors may opt to pocket the dividend and then sell off the fund afterwards unmindful of dip in the unit price, post dividend. Mostly the need for liquidity determines such strategies.

Based on share market index trends

The share market stock indices (“Sensitive index”) generally give a rough bench mark on how the business and trading climate is. Though, strictly speaking, each Mutual fund, based on how efficiently it is managed by fund managers, should not reflect too much on the goings-on at stock market indices, but, in reality, mutual funds are not totally insulated from general trends in the market.

    For investors who take cue from stock market, the selling of mutual funds too can follow the sentiments of the bulls and bears.  This approach is more like selling and buying shares and people who are good at it can definitely go by the trends in market .

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