When To Sell a Bond Fund

For all the press on the best bond funds to buy, much less attention is given to the issue of when to sell a bond fund. This information can be just as important, since it may save you from incurring losses in a portion of your portfolio you've designed to provide an element of safety.

With that in mind, here are five reasons why you should consider selling your bond fund.

Underperformance

This is the most obvious, but it’s amazing how long people will stick with a poorly performing fund. Some of the worst-performing funds still have hundreds of millions of dollars in assets invested by shareholders who are sticking it out.

This is unfortunate since there are many alternatives among mutual funds and exchange-traded funds (ETFs). Keep an eye on how your fund performs against its benchmark (the index it tracks) and the funds in its peer group. If a fund's return has lagged consistently over a long-term period of three or more years, it's time to sell and move on.

Massive Outperformance

This one is more counterintuitive. Why consider selling a bond fund that’s delivering outstanding returns? The reason is that it may be taking on too much risk, or the managers may have concentrated it in a single asset class.

While the manager may adjust the portfolio by selling the winners and reinvesting elsewhere, substantial outperformance is a sign you should take a closer look at the fund to find out exactly how it’s generating the big numbers.

When Your Objectives Change

Certain asset classes carry higher risk and therefore are appropriate only for longer-term time frames. For example, high-yield bonds would be appropriate in a college savings account if you don’t need the money for another 10 years.

However, once you reach the point where college is, for example, only a year or two away, high-yield bonds are too risky for such a short-term objective. In short, there’s nothing wrong with selling a bond fund when it is no longer suitable for your goals.

A Similar Fund or ETF Has Lower Fees

Would you pay $5 for a gallon of milk when the store next door is selling it for $3.50? Of course not. But people will still pay higher fees for funds that often have alternatives that are essentially the same but much cheaper.

Over time, extra costs can add up. The issue of cost is particularly important when it comes to index funds. Take the time to see how much your fund is charging you, and if you can do better, consider making the change.

The Fund’s Strategy Changes

There are many reasons why a fund’s strategy would change: a new manager; shifts in the fund company’s lineup; and sometimes the addition of a new strategy to an existing fund (often accompanied by words such as “Enhanced” or “Plus” suddenly appearing in the fund’s name).

When this occurs, the fund may no longer provide the type of risk-and-return profile you have come to expect, and its record of past performance becomes even less of an indication of future results than it typically would be. Once a fund’s strategy changes, make sure you put it on a short leash and keep a careful eye on performance results that may be different from what you’ve witnessed in the past.

Tax Liability

Before you sell a fund, consider the taxes you'll be responsible for. If you hold a fund in a taxable account, you will be liable for any capital gains that have been accrued. You might trigger more taxes than you want to handle at that time.

While this isn’t as much of a concern with bond funds as it is with stock funds, make sure you look into your potential tax liability before you make any investment decision.