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Know when to trade your mutual fund in

A1m0s | Dec 7, 2009 |

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Anytime you are investing regardless if it is in your IRA, 401K or taxable account there comes a time to sell your mutual fund and buy another. You can do this because of rebalancing, asset allocation changes or even if your timing the market. Those are all good reasons to sell your mutual fund but that is not what this article is about. As an investor you want invest in the best funds to fit your asset allocation. The ability to determine when to sell your mutual fund can be just as important as buying the right one for you.

So how do we know it is time to sell a mutual fund? Some of the warning signs are that the manager has quit of has announce he is about to. The fund company has been sold or is merging with another company. Has the fund gotten to large and bloated? Just because these event have taken place does not mean you want to trade your fund in. It simply means you need to watch the funds performance. Many times a new manager trained by the old will do a better job than his predecessor. Many times a new owner of the fund company will have better research.

Check the funds performance against its index and its peers. Check the performance both in up and down markets. Very few funds do better than the market in down markets and up markets (finding funds like this are an investors dream). Some lose very little in down markets but do not do as well in up markets. This is the manager's style and can lead to much higher returns over time. Other funds do much better than the market on the way up but do a little worse on the way down. These funds can still lead to high returns over time. The funds you want to get rid of are those that do not do as well on the way up and do worse on the way down.

Funds that are too large should be sold in my opinion. A domestic stock fund with over 3 billion in assets and a global fund with over 10 billion in assets are too large. Mutual fund companies know that size affect performance hence they often close really good funds to new investors to prevent fund bloat.

If you keep the best mutual funds in your portfolio you are investing wisely.