KNOWING WHEN TO SELL A MUTUAL FUND

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If you are no longer satisfied or excited about your mutual funds, you may be considering selling it. However, think twice.

Mutual Funds are not Stocks

Bear in mind that mutual funds are not the same as mutual funds. A slump in the stock market does not necessarily mean that you have to sell the fund. Stocks have rates of return associated with what the market will bear.

Basically, stocks are dragged down or pulled up by the “buy low, sell high” approach. That’s why in a slumping stock market, many investors panic and rush to ditch all stock-oriented assets.

Meanwhile, mutual funds are not singular entities. They are basically baskets of financial instruments, like stocks and bonds, which will be chosen by a portfolio fund manager based on the fund’s strategy. One benefit of this portfolio of assets is diversification.

There are many types of mutual funds, with different degrees of diversification. Sector funds will sport the least degree of diversification, while balanced funds have the most.  In general, however, the decline of one or a few of the stocks can be offset by other assets within the portfolio.

Selling the Fund

When selling your mutual fund, you have to consider a couple of factors:

Back-end Loads

If you are holding a fund that charges a back-end load, the total that you receive when redeeming your units will be affected. Front-end loads, meanwhile, are sales fees charged when you first invest your money into the fund.

If the fund has a back-end load, the charges will be subtracted from the total redemption value. For many funds, the back-end loads are usually higher when you liquidate your units earlier instead of later. That means you need to consider if liquidating your units now is optimal.

Tax Consequences

If the fund acquired huge capital gains in the past, you may have to shoulder big capital gains taxes if the fund is in a taxable account. When you redeem units of a fund that has a bigger value than the total cost, you will acquire a taxable gain.

Changes in the Fund

There are changes in the fund that you should pay attention to. Even if these things do not necessarily mean you should change the fund or quit it, they should catch your attention and you should scrutinize them.

Change in Fund’s Manager

When using a mutual fund, you are basically entrusting your money to another person, relying in his or her expertise and knowledge in the hopes of achieving returns.

If your fund suddenly has a new manager, research why. For other funds, the prospectus should indicate the reason for the change.

Change in Strategy

If you did your homework, you’re probably invested in a fund that reflects your financial goals. If you see that the fund is suddenly invested in assets that don’t reflect your financial goals, you ought to re-evaluate your fund.

Consistent Weakening

This can be confusing because weakening or underperformance is different from investor to investor. If the mutual fund returns have been poor for less than a year, you may not have to sell it yet since it may just be experiencing some short-term fluctuations.

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