Topic 3: What to Look Out for Before Selling Your Mutual Funds
Many time investors just sell or switch their mutual fund units, as they feel they have made decent profit. However, financial planners suggest investors do a basic check before undertaking selling or switching.
1. How has the scheme performed?
Many investors are disappointed if a scheme does not perform in line with their expectation. For example, some are under the myth that if a stock doubled in two years, they would expect even an equity mutual fund scheme to do so. Financial planners suggest not to look at the performance of a mutual fund scheme in isolation. They suggest investors compare performance with the benchmark to know if your scheme is underperforming or the entire market is on a losing spree. If your scheme consistently underperforms for more than a year or more, it is time an investor takes a deeper look. Check for changes in the fund management style, change of fund managers. If it does not improve and you are not satisfied with the reasons, it may be a time to exit it. But if you have not given enough time, hold on to it.
2. What change has happened in your asset allocation?
Many investors work on the principle of asset allocation to maximize returns and minimize risks. If you use this approach to manage your portfolio, it necessitates re-balancing at regular intervals. So, in a rising market, when the equity component goes up, you may have to sell equity mutual fund schemes and come to fixed income to keep your asset allocation constant and come back to original asset allocation.
3. Has the investment goal been met?
Many investors tag their investments to a specific goal when they invest in mutual fund schemes. For example, if you are saving in an equity-oriented fund for your child’s education, and you accumulate the corpus you need for this goal, before time, it makes sense to switch the equity investment to a low risk liquid or ultra-short term debt fund a year before reaching the goal. This will ensure that even if the equity markets were to fall, your investments would remain unaffected and you will be able to reach your goal.
4. What factors do you need to consider before selling your mutual fund units?
Consider the exit load if any, and the tax implications before you sell your mutual fund units. For example, equity funds generally have an exit load of 1%, if you exit before one year and short-term capital gains tax of 15%. Similarly, fixed income schemes will be subject to short term capital gains if you sell any time before three years. Weigh in the impact of these things on your returns before you sell your mutual fund.
Source: Economic Times
1. How has the scheme performed?
Many investors are disappointed if a scheme does not perform in line with their expectation. For example, some are under the myth that if a stock doubled in two years, they would expect even an equity mutual fund scheme to do so. Financial planners suggest not to look at the performance of a mutual fund scheme in isolation. They suggest investors compare performance with the benchmark to know if your scheme is underperforming or the entire market is on a losing spree. If your scheme consistently underperforms for more than a year or more, it is time an investor takes a deeper look. Check for changes in the fund management style, change of fund managers. If it does not improve and you are not satisfied with the reasons, it may be a time to exit it. But if you have not given enough time, hold on to it.
2. What change has happened in your asset allocation?
Many investors work on the principle of asset allocation to maximize returns and minimize risks. If you use this approach to manage your portfolio, it necessitates re-balancing at regular intervals. So, in a rising market, when the equity component goes up, you may have to sell equity mutual fund schemes and come to fixed income to keep your asset allocation constant and come back to original asset allocation.
3. Has the investment goal been met?
Many investors tag their investments to a specific goal when they invest in mutual fund schemes. For example, if you are saving in an equity-oriented fund for your child’s education, and you accumulate the corpus you need for this goal, before time, it makes sense to switch the equity investment to a low risk liquid or ultra-short term debt fund a year before reaching the goal. This will ensure that even if the equity markets were to fall, your investments would remain unaffected and you will be able to reach your goal.
4. What factors do you need to consider before selling your mutual fund units?
Consider the exit load if any, and the tax implications before you sell your mutual fund units. For example, equity funds generally have an exit load of 1%, if you exit before one year and short-term capital gains tax of 15%. Similarly, fixed income schemes will be subject to short term capital gains if you sell any time before three years. Weigh in the impact of these things on your returns before you sell your mutual fund.
Source: Economic Times