4 Reasons for Selling Mutual Funds

There are several good reasons for selling mutual funds. Here are some indicators to watch out for to help you decide when to sell a mutual fund.

1. Fund Manager Quits

Peter Lynch is famous for his management of the Fidelity Magellan mutual fund. During the 13 years he managed this fund, Magellan bested the S&P 500 benchmark for 11 years. During his tenure as the fund manager, Magellan achieved a 29 percent average annual return. When a successful manager retires, the new manager may have an entirely different management style. This change may be good or bad for the fund's performance. If the new manager's goals are not consistent with the goals you had when selecting the fund initially, the change of managers may be a good reason to sell a mutual fund.

2. Fund’s Turnover Rate

Mutual funds buy a wide range of stocks. Some buy stocks in certain industry sectors, whereas others focus on certain investing strategies, like buying growth companies. Every time a mutual fund buys or sells a stock, it has to pay a commission. This commission can greatly reduce the potential profits of the mutual fund. A fund that has a very low turnover rate does not incur a lot of expenses. A fund that has a 100 percent turnover rate will sell every stock it purchases during the year. The cost of this frequent trading can greatly erode the profits the mutual fund can offer. If your mutual fund has a high turnover rate, consider selling it for a fund with lower expenses.

3. Fund Size

Everyone knows that it is much easier to turn around a sports car than it is to turn around an 18-wheel truck. Smaller mutual funds are much more nimble and are able to react more quickly to changes in the economy and the stock market. For this reason, smaller funds outperform much larger funds. The problem is that people want to jump on the band wagon of smaller funds because they are attracted to the returns offered by the fund. This infusion of new money into the fund drives it from a small and nimble fund to a larger and less responsive fund. If you feel that your fund has gotten too large and its average annual returns are declining, it may be a good time to sell the fund.

4. Tax Bill

Some funds sock the owners with tax bills at the end of the year even if the owners did not sell any shares of the fund during the year. Capital gains and dividends are the primary reasons a mutual fund can create a tax bill. Owners are required to pay taxes but do not have any income to offset the cost of that tax. If you are consistently hit with a huge tax bill from your mutual fund, you might consider selling it to invest in a mutual fund that has less of a bite at the end of the year.