What to Know When Selling Your Position in a Mutual Fund

A mutual fund is an investment option that allows you and other investors to pool finances together to purchase stocks, bonds, shares, or other securities as preferred in your portfolio.

Mutual funds are a preferred investment option because of their high liquidity, regardless of whether you operate open or close-ended options. The possibility of investing in small amounts is highly attractive to most investors, and when set up the right way, a mutual fund can also help you save your income tax costs.

Although the benefits of investing in a mutual fund are apparent, you might want to sell your position in the fund down the line. Before opting out and selling your position in the fund, there are a few things you need to know among them when you need to sell and the tax implications.

When You Should Sell Your Mutual Funds 

Several reasons can push you to sell your mutual funds, but panic selling shouldn’t be one of them. Like every other investment option, your portfolio can suffer some rough times. If you sell prematurely, you forego any chances of recovering and lock yourself in a loss. Other than emotional selling, some of the other legitimate options that can drive you to sell your mutual funds include:

The fund is underperforming 

Poor investment choices by the management or high fees are some of the reasons that can cause a fund to underperform. It’s almost impossible to assess the performance of the fund unless you compare it to its peers.

It’s best to consider several factors before judging the performance of the fund. Some of the factors to check are market trends and how the fund has been performing over the previous years before deciding on the fund’s performance.

You need cash 

Mutual funds are highly liquid, making them a quick source of funds for those unexpected emergencies.

Before you decide to liquidate your portfolio, ensure it’s your best option. The effect of losing future earnings can affect you for many years. Consider other options like a home equity line of credit or selling some items you no longer need before tapping into your mutual fund. 

You have reached your financial goal 

When investing, you have a goal in mind. For most mutual fund investors, that goal is saving. It could be for retirement, to buy a home or start a business. Once you reach your target, it makes sense to liquidate and start the next chapter of your life.  

You are rebalancing your portfolio 

Keeping a balanced asset allocation is crucial to your portfolio. At times, that means selling some of your investments and buying others. 

For instance, if you have equities and bonds, equities grow faster than the bonds, which might leave you with too much equity exposure and little debt in your portfolio. To rectify the situation, you could sell some of your equities (in this case, mutual funds) and buy more debt. 

To manage your tax bill 

When you invest in a taxable account, tax implications play a vital role in your decision making. Most investors try to use tax-loss harvesting to lower their tax bills. It’s also possible you made some regrettable decisions when investing, and you would like to relocate your capital to options that attract fewer taxes. 

person thinking about selling mutual funds

The Tax and Cost Implications of Selling your mutual fund 

Taxation plays a profound role in your portfolio choices and will impact your sale as well. For most people joining and being part of a mutual fund is the easy part. Selling it is a little tricky and there are several costs and taxes involved. 

Shareholder Fees 

Shareholder fees are one of two broad-spectrum fees applied by mutual funds. The other type of fees are the annual fund operating expenses. Some of the shareholder fees you’re expected to pay could include: 

  • Sales loads – sales loads fees will differ depending on the class of shares you have. A- class shares have a front end sales load while B-class shares have a back end. The C-class shares can carry commissions or have back end sales. When you sell mutual funds, the sales loads the percentage deducted depends on the type of shares you have. 
  • Account fee – If your account falls below a specified minimum investment before you sell it, it will attract an account fee which is charged to maintain the account. 
  • Purchase fee – The purchase fee is paid by the person buying your shares. It’s paid to the broker for selling the fund. However, unless you’re selling and buying, you don’t need to worry about the purchase fee if you’re only selling.

The specifics and percentages of your shareholder fees are in your mutual fund’s prospectus. The shareholder fees vary from fund to fund.

Exchange fees 

Some mutual funds will charge shareholders some type of investment fee if you’re transferring to another fund within the same group in addition to other fees like the shareholder fees. 

If you’re selling your mutual fund to transfer to another fund within the same company, the investment company’s management will likely charge you an exchange fee. 

The exchange fee will only occur when an inter-fund transaction is request. However, not all mutual fund companies will charge a fee for exchanging shares. 

If you’re transferring your shares on an exchange privilege, most mutual funds will not charge you. However, if a capital gain occurs, exchanging the shares could trigger taxation unless you’re converting share classes in the same fund. 

Early Redemption Fee 

The early redemption fee is a cost borne by investors when they sell their shares in a fund. Typically, the fee will be charged by the find company and added back to the fund. The early redemption fee is also called an exit fee or a market timing fee. 

The goal of having an early redemption fee is to discourage short-term trading and the fee is deducted in accordance with the amount of the share. 

The fund channels the redemption fees collected back into the mutual fund and distributed among the shareholders based on the percentage of their shares to be invested in the fund’s portfolio. In most cases, mutual fund companies will charge you a redemption fee if you exit the fund within 30 days of the initial purchase. 

Unlike other charges associated with selling your stake, redemption fees are avoidable by ensuring you conduct thorough research to identify the company’s time limit and avoiding short-termism.

Tax Obligations 

In addition to the fees associated with the sale of your stake, you could also owe taxes. Some of the taxes you might be liable for include long-term or short-term gains tax. You might also have to pay tax on your proportionate share of the fund’s capital gains which is done through distribution. 

Final Thoughts 

Selling your mutual fund is an event with several intricate details. If you’d like to learn more about mutual funds, how you can sell your position, and any tax reprieve you’re entitled to, get in touch with us, and we will be happy to walk you through the details.

Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.bogartwealth.com
Please Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. 
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