Financial housekeeping includes a periodic portfolio review, including mutual fund holdings. Mutual funds, which are essentially a compilation of stocks and bonds, offer a kind of automatic diversification for investors. While investment pros say diversification is an essential component of long-term investing, a comprehensive portfolio review requires close examination of mutual fund performance, the holdings within the funds, and also the strategies and management of the fund. Consider these and other factors before deciding whether to sell mutual funds.
Ownership Benefits and Drawbacks
While mutual funds are touted for the diversification aspect they bring to portfolios, mutual funds' protection against general market volatility is also the vehicle's Achilles' heel. Because mutual fund investors buy slivers of stocks and bonds, any downturn in a particular stock doesn't send the whole investment reeling. On the other hand, a price doubling in a particular stock plays out as a watered-down return. While it's not likely any investor will get wiped out with a decent mutual fund, the investment will likely also not result in huge wealth creation.
Any number of factors can lead investors to a sell decision on mutual funds. Likely at the top of the list is poor fund performance. Even if a fund includes a few rock stars as part of their composition, too many under performers weigh down the funds' performance overall. Changes in fund management might also cause an investor to rethink ownership of a particular mutual fund. Mutual fund ownership comes with the expertise of a professional money manager. Especially in cases where a manager steps down from funds already owned by an investor, a new fund manager's approach might not keep step with investment goals and values.
When investors get a check in the mail for the mutual funds they've cashed out, it's not necessarily the end of the story. If the fund has been profitable, capital gains taxes come into play. If the fund has lost money, the losses can offset other assets where investors gained. Determining tax implications is a complex topic with contingencies based on individual circumstance. According to "The New York Times," however, two-thirds of mutual fund shares are held in retirement accounts or annuities. Both vehicles hold tax-favored status. Selling the funds, then, means tax implications could eat into any profit investors have managed to earn.
When investors determine a mutual fund sale is the best strategy, savvy savers have a plan for where to put the money. In some cases, the money coming out of the fund is already earmarked for college tuition or retirement expenses. In other cases, however, the funds aren't needed immediately and can be reinvested elsewhere. In this case, assets to consider include individual stocks or commodities, including precious metals, real estate and antiques.
Romona Paden is a writer based in the Kansas City area. For more than a decade, she has contributed to general business and trade publications, as well as various websites.