When Should You Pull Out of a Mutual Fund?
In an ideal world you should pull out of a mutual fund on the day that the fund share price reaches its all-time high. However, no one can accurately predict future movements of the stock market, so instead of trying to cash in at the market high point you should use other factors such as your immediate and long-term financial needs when deciding the time to sell your funds.
Other People Are Reading
-
Financial Needs
-
Typically, people treat mutual funds as long-term investments and most people have some kind of goal in mind when they buy their mutual fund shares. If you invested in a fund to save for college or retirement, you should consider liquidating your fund holdings when you retire or start college. The Internal Revenue Service requires you to start making withdrawals from most kinds of tax-deferred savings accounts no later than the year in which you turn 701/2. If you reach that age, you have no choice but to sell some of the shares you hold in your retirement accounts.
Fees
-
When you buy shares in a mutual fund, you often have to pay an upfront commission called a load that often exceeds 5 percent of the purchase amount. Other kinds of funds have no upfront cost but instead have a back-end load. The amount you pay as a back-end load decreases each year that you hold the fund until after eight years you pay no sales fee at all. Front-end load shares have lower annual operating costs, so over time front-end load shares become less expensive overall than back-end load funds. Do not sell front-end load funds until you have at least made back the commission you paid upfront through growth, and try to time your sales of back-end load funds to minimize the cost.
-
Taxes
-
If you buy and sell shares of a mutual fund within a 12-month period, you have to pay ordinary income tax on your account earnings. If you sell a fund that you have owned for more than 12 months, you instead pay capital gains tax on your earnings. Income tax rates vary but most people pay more in income tax than they would pay for capital gains tax. If you are close to the 12-month mark and are in a high tax bracket, consider holding onto your fund for a few months to minimize your taxes.
Other Considerations
-
Mutual fund share prices are very volatile and funds have ups and downs. Many analysts recommend that you stay the course and keep hold of funds during downturns, but some funds never recover from market downturns and you should consider limiting your losses by selling a fund that has performed poorly and looks set to continue in the same vein.
Generally, most investors move their funds from stocks and aggressive mutual funds to more conservative instruments as they near retirement age so that they can reduce their exposure to principal risk. However, depending on your income level you may or may not have to sell your shares to safeguard your financial future.
-
