The biggest confusion surrounding mutual funds is when to sell them. Many people sell based on market sentiment, sometimes panicking due to underperformance. But it’s important to understand the right reasons and the wrong ones.
Mutual fund investment is a long journey, and patience plays a key role. So here we’ll look at the circumstances under which mutual fund redemption is appropriate, and when you should simply wait.
Reasons for Cashing out or Exit a mutual fund
Mutual Fund Redemption When You Need Money
The first and most important reason is this: if you need money. This should be a need, not a want. If you’ve been running mutual fund SIPs for years to achieve a major goal, such as buying a house, your children’s education, or their wedding, and the time has now come, redemption is perfectly fine.
You can see what the maturity value of your SIP will be and how much difference it will make if you withdraw it now. Use our SIP Investment Return Calculator.
Mutual fund withdrawals are recommended only when goal-based investing is complete. Even in an emergency, selling mutual funds can be used to achieve the desired outcome, as this is the true purpose of wealth creation.
Short-Term Underperformance and Selling Mutual Funds
People often panic when a fund underperforms for 2–3 years. But this isn’t the right reason. Even the best stocks don’t perform for many years, but they deliver strong returns in the long run.
Mutual fund performance shouldn’t be judged by the short term. Long-term mutual fund returns are the true benchmark, and patience is required to understand them.
Looking at Market Levels
It’s often said that the market has become expensive, so withdraw your money. But the truth is that no one knows where the market will go. An expensive market can become more expensive, and a cheap one can become cheaper.
Therefore, it’s not wise to exit investments based solely on market levels. However, if retirement is near or the goal is just around the corner, partial withdrawals may be appropriate. A scientific approach to retirement planning is more useful than market timing. Calculate with our Retirement Calculator.
When AUM Increases
Increasing AUM in large-cap, multi-cap, or flexicap funds doesn’t matter much because they offer ample opportunities. But if a small-cap fund receives too much money, it can be problematic.
Small-cap funds have a limited number of companies eligible for investment. In such a situation, the nature of the fund may change, replacing the original small-cap funds with larger companies.
Fund Philosophy Changes
If a fund doesn’t adhere to its stated approach, it’s a matter of concern. For example, if a fund calls itself a value fund but actually buys growth stocks, this amounts to a breach of trust. Investors chose the fund based on its philosophy, not for any other reason. Therefore, staying true to the label is essential.
Fund Manager Change
Often, investors place their trust in the fund manager. If that person leaves their job, retires, or moves elsewhere, it becomes necessary to re-evaluate the investment.
Unsound Fund Categories
It’s not always beneficial to stay invested in certain categories for long periods of time. Sectoral, thematic, and hybrid funds are examples of these. These have a very narrow mandate, and it’s often wise to exit them. Broad-based funds or index funds prove to be a more balanced option.
Conclusion
The right reasons to sell a mutual fund are genuine need, achievement of a goal, change in philosophy, or the departure of the fund manager. The wrong reasons are short-term underperformance, market levels, or general AUM growth. Funds with a clear and focused mandate tend to be better in the long run, while it’s safer to avoid funds that are a mess.
FAQs
Q1. When is the right time to exit a mutual fund?
The right time to exit a mutual fund is when your financial goal is achieved, or if the fund consistently underperforms compared to its benchmark for a long period. Mutual fund exit should always be linked to your personal investment plan.
Q2. Should I cash out my mutual fund during a market crash?
No, market crashes are usually temporary. Selling mutual funds in panic can lead to losses. Instead, focus on long-term mutual fund returns, as markets generally recover with time.
Q3. How long should I stay invested in a mutual fund before selling?
Most equity mutual funds need at least 5–7 years to deliver stable returns. Mutual fund investment works best when you stay invested long term instead of trying short-term market timing.
Q4. What are the tax implications of cashing out a mutual fund?
Cashing out mutual funds can attract capital gains tax. Equity funds sold within one year attract short-term capital gains tax, while long-term gains beyond one year are taxed at a different rate. Always check mutual fund taxation rules before redeeming.
Q5. Is it good to withdraw mutual funds when NAV is high?
A higher NAV does not necessarily mean it’s the best time to withdraw. Mutual fund NAV reflects portfolio value, but the decision to exit should depend on goals, performance, and asset allocation, not just NAV levels.
Q6. What are the common reasons to exit a mutual fund investment?
The main reasons include reaching your financial goal, urgent cash needs, fund manager or philosophy change, or consistent underperformance. Wrong reasons include panic selling due to market fluctuations or short-term dips.