Many investors are still to fully understand the concept of a mutual fund. They continue to treat it similar to investing in shares. Therefore, they tend to buy mutual funds for wrong reasons - low NAV of a fund; dividend announced by a MF; New Fund Offer etc.

The same misconception is seen in selling too. One of the most common instances of selling a mutual fund has been to invest in a New Fund Offer. This is under the false impression that a fund at Rs.10/- is cheap and an excellent opportunity to invest. Many investors have been misled by distributors into this kind of switching. (Also read - Invest wisely and get rich with equity MFs)

Further, the profit booking strategy for stocks may not strictly be applicable to mutual funds. It is the job of the fund manager to keep buying under-valued or fairly-valued stocks, while booking profits by selling overvalued stocks Therefore, by selling a MF from a profit booking perspective, we may actually be selling off a fairly valued portfolio - with a good long-term potential.

Therefore, what could be the possible situations for selling a MF?

Financing a need

A very obvious reason to sell would be when you need money. We all invest money with a view to finance some need or a desire in the future.

Say, you planned to buy a car or a house; or need to pay your child's fees; or maybe you want to take a vacation abroad. All this would require you to liquidate some of your investment. (Also read - Trading tricks that've stood the test of time)

However, proper choice is essential in deciding which fund(s) to sell. You could either sell those funds, whose performance has not been encouraging; or those where the tax impact is minimal; or those where the amounts are not very significant; etc. Or sometimes, possibly it may be better to borrow rather than sell a good investment.

Poor performance

There are more than 200 equity funds and their number is growing. The returns from practically all funds have been comparatively quite good, given the current bull-run. Even the worst performing funds have given 30-35% returns in last 1 year. In absolute terms these are excellent returns. But when compared to the top performers with 110-115% returns, these look extremely poor.

However, the key here is to look at long-term returns - 1-yr, 3-yr & 5-yr - and compare it with both the benchmark index and other funds in the peer group. In the short term there could be a genuine reason for under-performance. Some of the investments may be from a long-term perspective; certain sectors may have been under-performers; contrarian investments take time to catch market fancy, etc. (Also read - The Investors biggest Dilemma)

But if the performance of the fund continues to be consistently below par over long periods of time, then it may be worthwhile considering switching over a better performing fund. If possible, one should also try and assess the reasons for poor performance. This will give a good insight into the market.

Rebalancing the portfolio

We all have a certain asset allocation across various investment options such as debt, equity, real-estate, gold etc.

A change in your financial position may require you to rebalance your portfolio. Suppose you are presently having a well-paid job and are unmarried with no liabilities. You can, therefore, take much higher exposure in equity MFs. But with marriage and kids your responsibilities may increase, which would require you to reduce you equity risk to more manageable levels.

Or the portfolio balance changes with time, due to different assets growing at different rates. Your equity portion may have appreciated much faster than your debt, distorting the original balance. Hence you would need to sell equity and re-invest in debt to restore the original balance. (Also read - Mutual Funds: Your best personal Portfolio Manager)

Or maybe a new asset class has been introduced in the market - a real-estate fund or a gold fund - and you want to take advantage of it. Thus you may have to sell a part of your existing investment and re-invest in this new asset class.

Change in taxation policy...

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