10 Reasons to Sell a Mutual Fund Other Than Poor Performance

There are at least 10 good reasons for dumping a mutual fund or an ETF besides poor performance.
Paul Jacobs
Published: March 30, 2016
There are at least 10 good reasons for dumping a mutual fund or an ETF besides poor performance. 


1. The fund did too well–for all the wrong reasons. 

If your fund has dramatically outperformed its peers over the short term, find out why. Look up the fund's holdings and manager commentaries found on the fund website. Consult morningstar.com. 
 
Spectacular short-term performance often indicates the fund manager is doing market timing or taking too much risk. It’s great while it lasts, not so great when the fund tanks.
 

2. The fund performed so well your portfolio needs to be rebalanced. 

Excellent performance may leave you with too much in one asset class. You may need to sell at least some of your position in the fund to get your asset allocation back on target. By rebalancing regularly, you will continually be buying low and selling high. 


3. You want to capture a capital loss. 

If a fund has declined in value because the overall market has fallen, selling for a capital loss to lower your tax bill often makes sense, especially if you sold a winner in the same year. You can either buy the fund back after 30 days, or you can immediately buy a different fund that uses a similar strategy to maintain market exposure. 


4. The fund manager changes. 

Don’t sell automatically, but make sure you are comfortable with the new manager. How experienced is he or she? Will he or she change the fund’s strategy? Most of the time I don’t sell a fund I recommended just because the manager changed.  But I do monitor the fund closely to make sure the new manager does not deviate significantly from the previous manager’s strategy. 


5. Style drift sets in. 

You want a manager to be disciplined and stay true to the fund’s overall strategy, which is why you bought it in the first place. Actively managed funds of all types—stock, bond and balanced—are especially vulnerable to drift. 
 
There are many ways for a fund to drift. A manager following the herd can lead to your fund becoming a closet index fund that charges higher fees but performs very similarly to its benchmark index. If your fund is no longer adding value, you should look for cheaper or better-performing funds that can deliver what you want.
 

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