Questions to ask yourself before selling a fund

What you’ll learn:

• How a change in the fund’s strategy could mean it is no longer appropriate for you.
• Why it’s important to consider your risk profile.
• How looking at other similar funds can help you decide if your fund is worth sticking with.

Knowing when it’s the right time to sell a fund isn’t easy, particularly if it hasn’t performed as well as you’d hoped, and you’re worried that you might be getting out just before things improve.

It can also be difficult to sell if your fund has been a star performer, as even though you might be keen to lock in gains, you may worry that you could miss out on further growth.

Here are four questions which you may want to ask yourself before selling a fund, to help you decide whether this is the right course of action. If you’re unsure what to invest in, or when to buy or sell, seek professional financial advice. Make sure to consider any costs involved in selling and purchasing funds, and the tax implications, as you may be subject to capital gains tax (CGT) on profits.

If you invest outside an ISA, any profits made above the annual CGT allowance of £11,300 for the current 2017-18 tax year, are subject to tax at 10% or 20%, depending on your tax band. Remember that tax rules can and do change and their effect depend on your individual circumstances, which can also change.

Do the reasons you picked the fund still hold?

Many of us become emotionally attached to our investments, especially if we’ve held them for several years, but this could prove a costly mistake if they prove to be long-term underperformers.

If you’re not sure whether to sell a fund or not, try to put your emotions to one side and think back to when you first invested in your fund and the reasons why you chose it. If these reasons remain intact, then you may decide it is worth hanging onto.

Is the fund underperforming?

It’s rarely a good idea to make any investment decision based solely on the how a fund has performed previously, as past performance is not a reliable indicator of future returns.

If your fund is underperforming, think about why this might be the case, and whether it could do better in the future, and remember that even experienced fund managers will have periods of poor performance.

That said, if a fund has consistently underperformed relative to other funds in the same sector, and the fund manager cannot offer a convincing reason why, it may be time for you to consider switching.

Has the fund’s manager or strategy changed?

If the manager of your fund leaves, you may see this as a reason to jump ship. However, it’s important to remember that even if a manager does go, the mandate for the fund will usually stay the same, so there’s unlikely to be any immediate dramatic shift in performance. Whilst a new manager may mean there’s a greater element of uncertainty, it is not necessarily cause for concern.

Before selling, look at the new manager’s track record and experience. If it is similarly to the departing fund manager, and the way the fund is run is unlikely to change, there may not be any need to move.

However, if you originally chose your fund specifically on the basis of the manager and they have left to run another fund with a similar mandate, you may decide you want to move your money with them.

Sometimes a fund manager may change their investment strategy. This may also prompt you to consider selling, particularly if the changes mean the fund no longer suits your needs. The best way to familiarise yourself with a fund’s strategy is to read the Key Investor Information Document (KIID), or Key Information Document (KID), which explains the fund's key features and charges. If you’re not comfortable with the fund’s strategy you may want to consider moving to one that’s a better fit.

Is your attitude to risk the same as when you first invested in the fund?

Your appetite for risk may change over time, so it’s important to consider whether the fund you are considering selling still fits your approach to risk.

For example, perhaps you may have invested in an emerging markets fund several years ago because at that time you were comfortable accepting a high level of risk in return for potentially higher rewards. However, if you are now nearing retirement, you may be more risk-averse, as any falls in your portfolio value could have a significant impact on your income when you stop work.

If a fund no longer matches your risk profile, then this could be a good reason to sell, or transfer to a different fund. Remember that all investments carry risk and there’s always the possibility that you could lose money or get back less than you invest.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.