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Exiting a Fund

When should a person sell his mutual fund units? This is one of the simplest yet complex questions, which always remains in the minds of most investors. Here is our view on this contentious question.

When should a person sell his mutual fund units?
Sriram M.B.

The obvious answer is whenever you want to. And that's a serious point, because even today there are some investors—specially of the older generation—who do not appreciate that mutual funds can be bought and sold at any time.

As far as deciding when one should sell fund investments, there are a number of circumstances that could trigger such a decision.

Firstly, many investors have a specific investment goal. Whenever this goal is met, they should sell off their investment. Of course it is difficult to be satisfied and easier to be greedy for more. Having a specific target makes the decision easier to make.

Mutual fund units should also be sold if there is a change in the way a scheme is managed and you don't like the change.

This is more applicable to equity funds where the impact of any change is more pronounced. Thus, a change in fund managers can be a reason to sell a fund, especially if you have doubts about how the fund will be managed under the new dispensation.

On the debt side expenses are one of the most important parameters while choosing a fund. If there is an increase in the expenses and you feel that this has not been compensated by better returns, then it is definitely time to sell. After all expenses are deducted from the returns a fund generates and so higher expenses mean lower returns for you.

A mutual fund is also about the convenience and a certain level of service. If you are dissatisfied with the service you receive then you can consider selling out. So there are a whole host of reasons why one should sell. But before selling you should of course consider tax issues.

Short-term capital gains tax at the marginal rate is 30 per cent, while long-term capital gains tax in 20 per cent with indexation benefits or 10 per cent, whichever of the two is lower.

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