When should you sell stock funds? (Most investors get this wrong) – Views on news from Equitymaster

I’m Divya Grover, here to help you make informed investment decisions in mutual funds.

Indian investors love to talk about mutual funds: which ones to buy, which categories are popular, which fund manager has the Midas feel, and more.

Coffee table conversations, WhatsApp groups and television debates usually revolve around one thing: what should we invest in next.

What rarely gets the same airtime is the more difficult question: when to sell?

Buying feels exciting. A new bet, a new beginning.

Selling, on the other hand, feels like pulling the plug. Some avoid it altogether, while others sell too often and cash out at the first sign of trouble.

Yet exits are more important than entrances.

Keep in mind that a great fund bought at the right time can still disappoint if you panic sell during a market crash. A mediocre fund can still deliver returns if you exit wisely.

Why should frequent mutual fund sales be avoided?

If your time horizon to the financial goal is at least five years away, short-term movements in the stock market should not impact their investment decisions.

For such investors, continuing to invest in equity funds regardless of market conditions allows their investments to grow and increase their wealth, bringing them closer to their intended goal.

On the other hand, if investors redeem their equity fund investments only to re-enter at a lower level later, they may miss out on future gains. This can be a hurdle in the process of wealth creation.

Timing the market is useless, especially for those who invest for the long term.

No one can accurately predict whether the market has bottomed out after a correction, or whether it will continue to rise after reaching a peak.

So there is a high chance that investors’ bets will not pay off as expected.

So the answer to the question of when is the right time to sell your stock funds may vary for each individual investor depending on their investment objectives.

Ideally, investors should consider selling their investments only under the following circumstances:

1. When the goal is approaching

If the goal for which investors invested is less than three years away, it is time to gradually reduce allocation to equity funds and move to less risky avenues such as safely managed debt mutual funds and/or bank deposits.

This protects the corpus against any sharp corrections at the end of the target period.

2. When investors have achieved the desired corpus

Investors who invested regularly during market highs and lows would likely have accumulated a significant amount of money over a period of time and achieved their goals.

Such investors may consider booking profits to protect capital against market uncertainties and volatility.

3. Change in fundamental characteristics of the investment fund system

Sometimes the fundamental characteristics of an investment fund may undergo changes, such as a change in control at AMC level, a change in the investment philosophy/strategy/style of the fund, a change in the fund category, etc.

Such changes may result in the plan taking a more aggressive/conservative approach and may no longer be consistent with the investor’s risk profile and investment objective.

In such a case, investors may consider selling their mutual fund units and investing in a fund that matches their investment objective.

4. Persistent underperformance of the mutual fund

At the time of periodic portfolio review, it is important to compare the performance of an investment fund with its peers and the benchmark.

If the mutual fund that investors have invested in has consistently underperformed most of its competitors and the benchmark across different market phases, then it may be time to buy it back and replace it with a better alternative.

Keep in mind that short-term underperformance should not be a reason to sell a mutual fund, as performance may improve in the future.

5. Financial emergency

In the event of a financial emergency or an unexpected increase in large expenses, investors may consider selling their equity mutual funds as they are highly liquid.

However, selling mutual funds should be seen as a last resort, and investors may first consider tapping into the corpus parked in the form of an emergency fund.

6. Change in personal circumstances

Someone’s personal circumstances can change over the years.

This may lead to changes in priorities, which may prompt investors to reconsider their existing financial objectives and investment approach.

For example, investors in their 20s may be willing to take high risk, but may be satisfied with safer options in their 40s.

If the new financial goals warrant a more aggressive or conservative approach, investors may consider selling their mutual fund units and replacing them with a suitable alternative.

7. Rebalance

Sharp movements in the stock market often cause the investment portfolio to deviate from the established asset allocation.

For example, during a bull run, the stock allocation in the portfolio may exceed the established limit, for example reaching 85% of the target allocation of 75%, and therefore make the portfolio riskier.

In such a case, investors may consider reducing the allocation by selling part of their investment to return it to its original level.

Finally

Investors should avoid knee-jerk reactions during market highs and lows.

Market volatility is an inevitable part of investing, and reacting impulsively to short-term fluctuations often does more harm than good.

So long-term investors should focus on their broader investment strategy, remain disciplined and maintain diversified portfolios.

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Have fun investing.

Disclaimer: Investments in mutual funds are subject to market risks; read all fund-related documents carefully. Registration granted by SEBI, registration as IA with Exchange and certification by NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors. Investing in the securities market is subject to market risks. Please read all related documents carefully before investing.