Mutual Fund Selling Time

Deciding on what funds and when to buy them can be an easier task than finding an appropriate answer to the question "When should I sell?" Often investors wrongly say farewell to their mutual fund instead of keeping them for a better period with more favorable returns. In order to avoid falling in the trap of selling in the wrong moment, consider the following advices:

1. Sell only if you need money!

   When deciding to sell a fund always weigh the opportunity cost and the potential benefit you will get from selling it right now. If the opportunity cost outweighs the potential benefit of selling the fund, then it is better to find another source to finance your current need. You can always borrow money from a friend or use a loan from a bank, but only if the interest rate is low. Otherwise, you can hurt your long term returns.
2. You are entering a different life stage!

   With a change in the social situation many people reconsider their investment portfolio in order to match it with their new needs. For instance, as you get married, another person enters your life with whom you may want to compromise the degree of risk you are willing to take and returns you want to achieve. On the other hand, people nearing their retirement decide to stake on more conservative investments.

3. Changed style or objective of the fund!

   Remember your motives for purchasing a particular fund and if you notice a considerable deviation from its initial objective, then it is time to say farewell to the fund.

4. New fund manager

   Even though a change in the fund manager represents a sound reason for selling the fund, do not be too hasty and give some time to the new one to prove that s/he is better than the previous. Additionally, if the fund is passively managed, there is a nil reason for impatience. On the other hand, if the mutual fund is actively managed then be careful and keep a close supervision on the performance of the new manager. But always allow some time for the new managers to prove their expertise!

5.  Change in the fund's size

   Old saying that size does not matter proves to be untrue in this case. For instance, a cap fund manager may be extremely good at investing in the stocks of small companies and as paradoxically as it can sound, their success may lead to their failure.

   Consider the case of a fund manager called Smith, who holds stocks of 25 small companies, and whose success has become so widely known that his fund experienced a sufficient increase in the assets. As a result he had more money to operate, but if he invested in these small stocks, he might end up owning a big percent of one stock, which in turn may lead to liquidity problems. In order to avoid such a situation, Mr.Smith will have to increase the number of stocks he holds. But will he be capable of selecting the other small companies since it was extremely difficult for him to choose the initial 25 companies?

6. Low fund performance!

   You should be very cautious when measuring the performance of a fund. You should also take under consideration the time period during which you evaluate the performance.

   When measuring the performance of your fund be sure to apply relative performance. Additionally even if your fund's performance has dropped with a particular percentage compared to other funds, do not be hasty and chase the other fund. This so called "Chasing Performance" syndrome is a quick way to ruin your long term potential returns.

   Always compare your fund with the ones in the same field by observing the 1-year, 3-year and 5-year performance reports. Only after you have done this comparison and the final result is underperformance, then you should consider switching it with other fund.

7. Increase in the fund's expense ratio!

   Since expenses represent a direct reduction of your returns, you should carefully consider if that of your fund are sufficiently increasing. In most cases it is highly improbable that the fund will significantly compensate for the incurred expenses, especially when speaking about both bond and money market funds.

Finally, always have in mind the reasons stated above and check them whenever you consider selling your fund. If your reason does not coincide with one of the ones we suggest, you'd better think twice and then take an action.

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