What is the right way to sell your mutual funds

Indian investors love to talk about mutual funds – which ones to buy, which categories are hot, which fund manager has the Midas touch, and more.

Coffee-table conversations, WhatsApp groups, and television debates usually revolve around one thing: what to invest in next.

What rarely gets the same airtime is the harder question: When to sell?

Buying feels exciting. A new bet, a new beginning.

Selling, on the other hand, feels like pulling the plug. Some avoid it altogether, while others sell too often, pulling money out at the first sign of trouble.

Yet, exits matter more than entries.

A great fund bought at the right time can still disappoint if you panic-sell during a market crash. A mediocre fund can still deliver if you exit sensibly.

How Investors Trip Over Exits

Think back to 2008.

The Sensex, which had touched 21,000 in January, collapsed to nearly 8,000 by October.

Many equity mutual fund investors bailed out in panic, swearing never to return. Had they simply held on, their portfolios would have doubled within the next five years.

Fast forward to 2017. Mid-cap and small-cap funds were delivering spectacular returns. Money poured in. The following year, many of those funds corrected 20–30%, wiping out gains for the late entrants.

This is particularly relevant today. Over the last year (July 2024 to July 2025), the size of the mutual fund industry has grown by Rs 10.39 trillion (tn). It moved up from Rs 64.96 tn to cross the Rs 75 tn mark for the first time in the previous month, reaching Rs 75.35 tn.

When an industry swells at this pace, new investors rush in, often without a clear plan for when to exit. That makes the risk of poor selling decisions even higher.

The Wrong Reasons to Exit

Before we explore when to sell, it’s worth spelling out when not to.

• Market panic: Selling during a correction because you cannot stand the red on your account statement is a sure way to destroy compounding.
• Short-term underperformance: Every fund has off years. Exiting because your fund lagged for a few quarters is premature.
• Peer pressure and fads: Your colleague shifts money into the latest AI or ESG fund, so you dump your old scheme. This is not strategy. It’s herd behaviour.

DALBAR, a US research firm, found that investor returns are consistently 3–4% lower than fund returns because of poor timing. Indian investors are no different.

The pattern is clear: Too many exits are emotional, not rational.

The Behavioural Angle

Why do investors get exits wrong so often?

It isn’t lack of information; it’s human nature. Panic in a crash makes them sell low. Greed in a rally makes them hold on too long.

The result?

They exit for the wrong reasons and stay put when they should act.

Behaviour and investing are inseparable. The same fund can reward or punish you depending on how you react when markets swing.

In 2008, many sold at the bottom. In 2020, redemptions spiked during COVID, only for markets to rebound sharply. The lasting damage wasn’t from the funds but from investors tripping over their own emotions.

This is why discipline around exits matters as much as picking the right scheme. Your returns are driven less by the market and more by how you behave in it.

The Right Reasons to Exit

So when does selling make sense?

1. When Your Goal is Achieved

This is the cleanest reason. If you started investing in a mutual fund to accumulate Rs 50 lakh for your child’s education and that target is now within reach, do not let greed keep you in equities. Move to safer ground.

Example: An investor who needed money for her daughter’s overseas education in 2023 had started an SIP in an equity fund in 2015. By 2022, the corpus had grown to the required Rs 20 lakh. Instead of redeeming, she kept the money parked in equities, hoping to ride the rally. But the 2022 correction made things worse. A planned exit would have secured the goal.

2. When Your Time Horizon Shortens

Equity funds need time to perform. Anything less than three years is risky. If your retirement is three years away, it makes sense to gradually move out of equities and into debt or hybrid funds.

3. When Your Portfolio Needs Rebalancing

Suppose you began with 60% equity and 40% debt. After a multi-year bull run, equity balloons to 75%. The portfolio is riskier than you intended. The rational step is to book partial profits and bring it back to 60–40.

Rebalancing feels counterintuitive, selling what is doing well. But it’s precisely this discipline that keeps risk in check.

4. When the Fund Loses Its Edge

Mutual funds are not eternal. Managers move, strategies drift and some schemes fall behind peers consistently. If your mid-cap fund has underperformed both the benchmark and the category average for years, loyalty is misplaced.

Example: SBI Small Cap Fund was once a retail favourite, but its shine has faded. Its returns now lag the small-cap category and investors holding on out of nostalgia may have missed better opportunities.

5. When You Need Liquidity

Sometimes, life trumps planning. Medical emergencies, down payments, or family obligations may force you to redeem. In such cases, the key is to exit with awareness of costs, not in blind haste.

The Hidden Costs of Exiting

Even when the decision is right, investors often overlook two critical factors.

Exit Load

Many funds levy an exit load, often 0.5–1%, if you sell within a year. For short-term traders, this is an invisible drag. If you invested Rs 5 lakh and redeemed in six months, a 1% exit load wipes out Rs 5,000 instantly.

Tax Implications

Equity fund gains under one year are taxed at 15%. After one year, long-term gains above Rs 1 lakh attract 10% tax. Debt funds have their own tax rules, especially after indexation benefits were scrapped.

Selling without accounting for these can reduce your net proceeds meaningfully. An investor redeeming Rs 10 lakh of equity gains may find Rs 50,000 or more disappearing in taxes if not planned properly.

What if You Don’t Have Goals?

If you do not have a clear goal, or if your only aim is to get rich, the temptation to time the market gets stronger.

Investors dream of selling at the top and buying at the bottom, but even professionals rarely get this right. Exits based on hunches usually backfire.

The simple discipline is to tie down your exits to specific goals or to time. Even if you have not set formal goals, let your investment horizon guide you, gradually shifting away from riskier equity to safer assets as the finish line comes closer.

How to Exit Smartly

Exiting is not binary. It does not have to be “all in” or “all out.”

• Systematic Withdrawal Plans (SWPs): Spread your exits over time, especially if your goal is a year or two away.
• Partial Exits: Book some profits, leave the rest invested.
• Align to Goals: Always tie exits to life events, not to market moods.

Example: Say you’re planning to buy a house in 2026 and will need Rs 10 lakh for the down payment. Rather than stressing about the market being up or down when the time comes, you could start an SWP in 2024. Bit by bit, your money shifts into safer debt funds, so when it’s time to pay, your savings are steady and stress-free.

Do Not Forget Debt Funds

Most exit conversations focus on equity, but debt funds have their triggers. After the 2023 tax change removed indexation benefits, many investors have been reconsidering their debt allocations.

Here, exits make sense if:

• You find a better risk-adjusted alternative, like fixed deposits or government bonds.
• The fund has taken on unexpected credit risk.
• Your liquidity needs require shorter-duration products.

But exiting debt funds simply because rates rise or fall can be just as shortsighted as panic-selling equities. The right move depends on your time horizon and need for stability.

The Midcap and Smallcap Dilemma

Right now, the hottest debate is whether to book profits in mid and small-cap funds.

Valuations are stretched. Flows are euphoric. The regulator has even issued cautionary notes.

Should you exit?

The answer: Only if your portfolio is unbalanced or your goal is near. If your small-cap allocation, meant to be 10%, has crept up to 20%, trimming makes sense. If you are ten years from retirement, panic-selling just because markets are frothy is unwise.

Consider this: In 2017, small-cap valuations were at nosebleed levels. Those who trimmed exposure preserved gains. Those who jumped in late and sold in 2018’s correction locked in losses. The difference was not in picking the right fund but in knowing when to step back.

Exit as a Strategy, Not an Emotion

Buying gets all the attention. Selling gets treated like an afterthought. But it’s exits that turn paper profits into real money or protect your capital from erosion.

The rules are simple:

• Exit when your goal is achieved.
• Exit when your horizon is short.
• Exit to rebalance.
• Exit when your fund loses its edge.
• Avoid emotional exits driven by noise.

Most importantly, plan your exits as carefully as you plan your entries.

The market will always surprise you. The question is whether you will surprise yourself by acting with discipline rather than impulse.

Happy investing.

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