Knowing When to Drop Out of Your Mutual Fund

It’s important to remember that mutual funds are designed to generate long-term profits.

Because mutual funds are diversified widely over a number markets and industries, and profits from the fund are divvied out proportionally to your cohort of fellow investors, you likely won’t see exorbitant returns all at once, like with some stocks. The advantage of mutual funds, historically, has been moderate returns over time in exchange for a relatively lower risk investment.

That being said, you shouldn’t impulsively drop out of your mutual fund. There are a number of factors you should consider before tapping out. Although there’s no cut-and-dry formula for when you should drop you mutual fund, below are a few scenarios that might lead you to reassess your investment in your mutual fund.  

Consistently Under Performing

Don’t panic if you’re mutual fund has reported a bad quarter or even a bad year. Especially, if the bad report is an anomaly in an otherwise well-performing fund. Time is an important factor to consider when assessing the profitability of your mutual fund. Before you decide to dump the fund, be sure that you’ve accrued enough performance data to make an informed decision. This also includes accounting for the funds historical performance. By tracking the fund’s performance history, you’ll be able to determine whether or not the fund, in general, has been trending towards negative or positive performances.

Tip: If you know it’s time to sell, consider how you might turn the loss into a win. One such strategy might be to utilize the funds to offset capital gains tax from profits from other investment sources.

Manager/ Strategy Switch

When you chose to buy into a particular mutual fund, you likely spent a good deal of time picking a fund that aligns with your personal investment and financial goals, one that employs an investing strategy that echoes your own philosophy. If your fund undergoes a manager or strategy switch, it’s important that you carefully scrutinize how these changes affect your personal investment goals. If the direction of the fund begins to alter its course by devising a new investment strategy that doesn’t fit into your overall investment plan, then you may consider switching to a more like-minded fund.

Fund Becomes Too Big

If a fund grows too quickly, it could be detrimental for the long-term performance of the fund. As funds grow, it becomes more difficult for the portfolio to effectively move assets. Your funds growth may begin to interfere with your investment strategy, in which case it might be wise to consider looking into smaller, more manageable mutual fund options.

The bottom line is, you’ve got to know what your financial and investment goals are in order to effectively assess whether or not it’s time to drop your mutual fund. It might also be a good idea to consult with your financial advisor, who may be able to help you get a clearer overview of your mutual fund and determine whether or not it’s time to sell.