Reasons to Sell a Mutual Fund

By Stock Research Pro • May 26th, 2009

For many investors the decision to sell a mutual fund starts and ends with the performance of the fund, with the argument is that the best way to evaluate mutual fund performance is against a benchmark. While there are a number of different benchmarks that are widely tracked, most professional money managers look to an index like the Standard & Poor’s 500 (S&P 500) to evaluate any fund that invests in large-cap U.S. stocks. Any fund that underperforms its appropriate benchmark on a consistent basis should be re-evaluated as part of a portfolio.

Other reasons to reconsider investment in a fund can include:

Change in Fund Management: Building a winning portfolio is most often based on experience and instinct developed over many years. In fact, much of the expense associated with ownership in a fund is what enables you to leverage this expertise. A change in fund management should lead you to reconsider the fund’s merit.

A Change in the Fund’s Composition: One of the reasons you choose a particular mutual fund is that it is in line with your investment objectives. Unfortunately, some fund managers will deviate from the fund’s stated objectives in an effort to spike the fund’s returns. If this happens and the fund becomes a riskier investment that intended, it’s time to get out.

Reduce Tax Exposure: Any fund held in a taxable account that is down from your initial purchase price can be sold to realize capital losses. These losses can be used to offset gains from your better-performing funds. If you’re selling purely for tax purposes, you will want to consider the timing of your sale as toward the end of the year many funds distribute (taxable) capital gains to investors.

Rising Expenses Associated with the Fund: Fund expenses (12b-1 fees and other operating expenses) negatively impact the actual return you receive. When the expenses associated with any particular fund rise, investors can often find a suitable substitute with lower expenses.

Portfolio Rebalancing: Over time, your asset allocation may diverge from your outlined objectives. As some funds perform well, their weight within your portfolio can grow beyond where you want it, leaving you over-exposed in that area. Selling off an appropriate portion of the fund can help bring your portfolio back into balance.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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