Determining When to Sell Mutual Funds

Deciding when to sell mutual funds can be a difficult part of investing. Many people hang onto their shares too long and end up losing money because of it. Here are a few things to consider about determining when to sell your mutual fund shares.

Back-End Loads

One thing that you will need to become aware of is whether your fund charges a back-end load. A back-end load is a sales charge that is imposed when an individual sells his or her shares of a mutual fund. Many mutual funds charge a sales fee on the front end, but if you did not pay that, there is a chance that you may have to pay one on the back end. 

In most cases, the back-end sales load is going to be eliminated if you hold your shares of the mutual fund for a certain amount of time. For example, the commission might be decreased by 2 percent after three years, and it might be completely eliminated after five years. If you can hold off for a little longer to avoid this commission, it might be a good idea. 

Tax Considerations

You should also think about the tax consequences of selling your shares of a mutual fund. When you sell your shares, you are essentially selling a portion of the shares of all of the stocks or other investments that are held in a mutual fund. This means that you are going to have a capital gain or loss on every share that is in the portfolio. Because of this, you are going to have to pay capital gains taxes or get a capital gains loss. If you are close to holding the shares of your mutual fund for over a year, you should wait until this happens. This way, you can pay long-term capital gains taxes instead of short-term. This means that you will potentially have to pay only 15 percent in taxes instead of paying taxes at your marginal tax rate.

Fund Manager Change

One red flag that might signal that you should get out of a mutual fund is when a fund manager changes. The performance of a mutual fund is directly related to the fund manager that is in charge. If that manager leaves, the performance might leave with him.

Strategy Change

Sometimes, mutual funds will implement a strategy change. For example, they might go from investing in growth stocks to investing in a combination of growth and value stocks. While sometimes a strategy change is for the best, other times, it can lead to bad performance.

Consistent Underperformance

If your fund is consistently underperforming, then you should most likely think about selling your shares. Compare it to the performance of the appropriate benchmark to decide if it is getting the job done.

Fund Becomes Too Large

Sometimes, a mutual fund can become too big for its own good. When a fund gets too big, it cannot grow as much as it once did and make movements in the market without being noticed. Buying a huge number of shares may have to be done in stages, and the fund will not be able to operate as efficiently as before.

blog comments powered by Disqus
Scottrade