Genuine Reasons for Which You Should Sell Your Mutual Funds

Image used for representational purposes. 

(Photo: iStock)

Equity mutual fund investors are heading for the exit in terms of their holdings as the COVID-19 impact takes its toll. There are many reasons behind selling your existing holdings but this can prove to be an action that can set you back on your-long term planning.

Equity mutual funds usually have a long-term role in the portfolio of generating wealth over several years. This is why they are used for goals that require a large accumulation and has quite some time till its achievement.

Selling such funds in haste can be counter-productive so here are some genuine reasons for which you can sell them.

Meeting Daily Expenditure

There can be times when there is a financial crisis as has been seen after the COVID-19 outbreak. People who have suddenly found their income slashed or even stopped need some amounts to ensure that their household keeps running and that several outstanding amounts are cleared up.

This is one genuine reason why there might be a need to raid the equity mutual fund units. However, this should be used as the last resort and not the first thing to do if there is some cash crunch.

Investors need to try and use other steps like reduction in expenses and looking for other sources of income. If nothing works out then there would be no choice but to sell the units.

Pay Off Very High-Cost Debt

There is a clear case to use the sale of equity mutual fund units to pay off debt if this cannot be serviced. Every debt needs a regular payment of installments and at the same time the interest rate being paid on the debt also matters.

A high-interest rate being paid like on a credit card (36 to 48 per cent p.a.) can be a huge burden. It is unlikely that the mutual fund investment would yield a return that is higher than this so it would make sense to pay off the debt. This will solve the debt problem but it will come at a cost because all the accumulated investment would be wiped off at one go.

Change in Risk Profile

If there is a situation wherein the risk profile of the investor has changed then this gives adequate reason for the investor to actually go and sell the equity mutual fund units. This means that if the conditions related to the individual have changed whereby they cannot take a higher amount of risk then it would require their portfolio to be balanced towards low risk investments. This would require the selling of the equity mutual fund units and it would be justified.

Achievement of the Set Goal

Conditions are often such that the goal that the investor has set out to achieve has been reached. This is likely when there is a rise in the equity markets and the value of the mutual fund has appreciated. So if this is the case then the investor would be using the money for the purpose of their goal.

Here the sale of the equity mutual fund units is justified but in a bad economic condition this is less likely and hence the investor who wants to build wealth for the future would actually be better off by continuing their investment and adding units at the lower cost due to the fall in value.

(Arnav Pandya is Founder of Moneyeduschool. )