Guidelines About When Is The Right Time to Sell Your Mutual Funds

If your fund becomes one of the worst performers, consider selling. However, you need to look at more than just the fund’s rating. Consider these guidelines for determining when to sell a fund:

1. You may want to sell if you have overlapping stocks in your portfolio. (For more about overlapping stocks, see the sidebar “Checking for overlaps in your mutual funds.”) You can use the Morningstar Portfolio X-Ray feature (portfolio.morningstar.com) to discover whether the two growth mutual funds that you own are holding shares in the same company. To stay diversified, you may want to sell one of the mutual funds and replace it with another mutual fund.
2. Look at the performance of comparable mutual funds using Personal Fund (www.personalfund.com). If a similar fund’s overall performance is down 10 percent, your fund is down 16 percent, and your fund’s performance consistently trails its peers, your fund may be a loser.
3. If your fund drifts from its original investment objectives, it’s not meeting your asset allocation goals. This underperformance can become especially problematic if the drifting fund spoils your efforts of diversification and doesn’t meet your asset allocation goals.
4. Keep track of changes in your fund’s management. If the fund hires a new money manager, that person may have a different investment strategy.
5. You may want to sell if your mutual fund’s expenses have been creeping up, if you inherited the fund, or if your broker sold you a fund with a high 12b-1 fee. High fund fees reduce your returns and make the fund less profitable than similar funds with lower expenses.
6. In a volatile market, you may discover that you’re a more conservative investor than you imagined. If you can’t sleep at night, sell your fund.
7. You pay taxes on your capital gains. If one of your mutual funds posts negative returns, consider selling the losing fund to offset your tax liabilities.
8. If the fund increases by three or four times its original size in a short time period and its performance starts to decline, you may want to sell. As the fund keeps growing and growing, the professional money manager can’t invest in the securities he or she knows and loves best, so the fund may start to acquire poor or average-performing assets.
9. Consider your needs. If you purchased the fund for a specific purpose and your life circumstances change, you should sell the fund and purchase one that meets your needs — even if the fund is doing well.