When To Sell a Mutual Fund

5 mins read
by Angel One

If your mutual fund scheme hasn’t worked well for a long time, selling its units may seem like the most sensible option for you. This activity, however, offers both advantages and disadvantages. Before you sell your mutual fund units, you should know whether the liquidation of the units will benefit you or have negative consequences.

Mutual funds are not shares

The first thing to know is that mutual funds are not the same as stocks. Thus, a stock market decline does not necessarily mean that it is time to sell the fund. Equities are individual units whose performance is related to market performance. Equities are guided by the “buy low, sell high” principle, which explains why many investors panic in a declining stock market and quickly divest all their equity-oriented assets.

Mutual funds are not individual entities; these are portfolios of financial instruments, such as equities and bonds, selected by the portfolio or fund manager in accordance with the fund’s strategy. The advantage of this portfolio of assets is diversification.

There are several types of investment funds, and the degree of diversification varies. For example, sectoral funds are the least diversified, while balanced funds are the most. However, in all investment funds, a decrease in one or a few shares may be offset by other assets in the portfolio that remain or increase in value.

As investment funds are diversified portfolios rather than individual entities, relying solely on market timing may be a useless strategy when selling a fund, as the fund’s portfolio may represent different markets. Also, as investment funds are focused on long-term returns, lower-than-expected returns in the first year are not necessarily a sign of a sale.

When Selling Funds Take Care of Below Mentioned Tips

See the list below to find out when selling your investment fund units can be beneficial:

When you have reached your investment goal:

The best time to sell your units is when you have achieved your investment goals or a few years before. Switching to a low-risk fund 1 or 2 years before reaching your investment goal will ensure that your investment plan is not hampered by sudden market volatility.

If the fund’s performance has been poor:

The investor generally invests in an investment fund scheme to earn a return. However, if the scheme has not been profitable for a long time, the investor may have time to sell the shares. To gain a better picture of the fund’s performance, you should compare it to this benchmark, category, and other best-performing schemes in the same category before opting to sell your units. Using this method, you can find out if the scheme is not working or if the whole market/sector is going through a bad phase. If you find that your mutual fund scheme has had a lower return for more than a year, it is advisable to check the reason before deciding to sell the units.

If the fund manager of the fund changes:

Although this does not clearly indicate that you should sell your fund units, this scenario still requires caution. As fund managers play a key role in the operation of the scheme, changes should always be made to the new experience and performance of the new fund manager. This will help you decide if you have time to start planning to leave your fund.

If the scheme’s strategy changes:

If you notice that the scheme’s fund manager is investing in financial products that are not in line with its original objectives, you may have time to revalue your holding. If you see that the new objectives of the fund are not in line with your investment objectives, it is best to sell your investment fund units.

When the RBI repo rate affects debt funds:

When the Reserve Bank of India (RBI) lowers repo rates, bond yields fall, while prices rise to provide better returns for debt funds. When interest rates rise, the returns offered by debt funds generally decline. In this scenario, you should call and leave your debt scheme. However, rather than focusing on one case, you should observe the overall trend of the RBI repo rate review before selling your debt fund units.

If you need to rebalance your portfolio:

If you have an asset allocation model that you want to follow, you may need to rebalance your holdings from time to time. This is done to return the portfolio to its original state in the event that the allocation tends to a particular asset. In such a situation, the investor may sell or buy more fund units to reset his portfolio. If you decide to change your investment objectives, you may need to consider rebalancing your portfolio, which may require the sale of units in specific investment funds.

If the scheme becomes too large:

Sometimes, if the fund witnesses rapid growth, its performance may be affected. As the fund increases, it becomes more difficult for the portfolio to move its assets. In general, this problem can be seen in the case of targeted funds or small-cap funds, as they either invest in low-volume and liquid equities or deal in fewer equities. If this happens, it is better to sell your mutual fund units.

Please note that the above situations do not oblige you to sell your investment funds, as the performance of an investment fund depends on several factors. It is therefore advisable to consult your financial advisor before deciding to sell the units of an investment fund.


Selling an investment fund is not something you do impulsively. It is important to decide thoroughly. Remember that you invested in your mutual fund because you were confident in it, so make sure you understand why you decided to sell it. If, after carefully weighing all of the benefits and drawbacks of your fund’s performance, you still believe you should sell it, go ahead and do it.


How Long Should I Hold Mutual Funds?

– Equity Mutual Funds: Hold for 5-7 years or longer to benefit from market growth and mitigate volatility.

– Debt Mutual Funds: Suitable for 1-3 year holdings, depending on the interest rate environment.

– ELSS Funds: Minimum of 3 years due to lock-in period, but longer holding can enhance returns.

Can a Mutual Fund Go to Zero?

Extremely Unlikely: Due to diversification, it is highly improbable for a mutual fund to lose all its value, though significant losses can occur during severe market downturns.

Is It Safe to Keep Money in Mutual Funds?

Generally Safe but Subject to Market Risks: Mutual funds are regulated and offer diversification, but they do involve risks:

  • Equity Funds: Higher risk and return potential.
  • Debt Funds: Lower risk, but subject to interest rate and credit risk.
  • Money Market Funds: Low risk, suitable for short-term investments.