Should I sell my mutual funds and buy ETFs?
If you're paying fees for a fund with a high expense ratio or paying too much in taxes each year because of undesired capital gains distributions, switching to ETFs is likely the right choice. If your current investment is in an indexed mutual fund, you can usually find an ETF that accomplishes the same thing.
The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.
However, if you have noticed significantly poor performance over the last two or more years, it may be time to cut your losses and move on. To help your decision, compare the fund's performance to a suitable benchmark or to similar funds. Exceptionally poor comparative performance should be a signal to sell the fund.
When your mutual fund has a significant capital loss, while other holdings incur capital gains, it might be time to sell. In such a case, if you sell the fund, you'll be able to secure a capital loss on your tax return. That loss can offset realized capital gains and ultimately lower your tax bill.
Please note that when you convert your current asset base into an ETF you do not ELIMINATE taxes, you simply carry over your basis from your underlying investments, and your old basis is now the basis in your ETF shares.
If you're paying fees for a fund with a high expense ratio or paying too much in taxes each year because of undesired capital gains distributions, switching to ETFs is likely the right choice. If your current investment is in an indexed mutual fund, you can usually find an ETF that accomplishes the same thing.
ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds. And, in general, ETFs tend to be more tax efficient than index mutual funds. You want niche exposure. Specific ETFs focused on particular industries or commodities can give you exposure to market niches.
Market Volatility and Risk Management
If a fund consistently underperforms over multiple periods and fails to deliver satisfactory returns, consider exiting the investment. Research and select funds with a similar investment objective but better track records and performance history to redirect your investments.
If you have money in mutual funds, using some of it to pay off debt, especially debt with high interest rates, might seem like an attractive option. But cashing in your mutual funds is not always the best way to become debt-free, and depending on how you hold those funds, you could end up with a big tax bill.
To discourage excessive trading and protect the interests of long-term investors, mutual funds keep a close eye on shareholders who sell shares within 30 days of purchase – called round-trip trading – or try to time the market to profit from short-term changes in a fund's NAV.
What is the 4% rule for mutual funds?
The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.
What is the 8-4-3 rule of compounding? In the 8-4-3 strategy, the average return of a particular investment amount for 8 years is 12 per cent/annum, while after that time period, it will take only half of that horizon, i.e., 4 years (total 12 years), to get a return of 12 per cent.
The 90-Day Equity Wash Rule states that anyone transferring assets out of an investment contract fund must transfer the assets into a stock fund, balanced fund, or bond fund with an average maturity of three years or more.
Mutual funds and exchange-traded funds (ETFs) are two distinct products – there is no way to transfer funds directly from one to the other. You must first sell your mutual funds and then purchase ETFs.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
Hold Funds in a Retirement Account
This means you can sell shares of your mutual fund or collect a capital gains distribution without paying the relevant taxes so long as you keep the money in that retirement account. You will ultimately owe any related taxes once you withdraw the money, of course.
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
Generally speaking, the best time to trade ETFs is closer to the middle of the trading day rather than the beginning or end.
The administrative costs of managing ETFs are commonly lower than those for mutual funds. ETFs keep their administrative and operational expenses down through market-based trading. Because ETFs are bought and sold on the open market, the sale of shares from one investor to another does not affect the fund.
- Nippon India ETF Nifty 50 BeES. ₹ 241.63.
- Nippon India ETF PSU Bank BeES. ₹ 76.03.
- BHARAT 22 ETF. ₹ 96.10.
- Mirae Asset NYSE FANG+ ETF. ₹ 84.5.
- UTI S&P BSE Sensex ETF. ₹ 781.
- Nippon India ETF Gold BeES. ₹ 55.5.
- Nippon India Etf Nifty Bank Bees. ₹ 471.9.
- HDFC Nifty50 Value 20 ETF. ₹ 123.2.
What is the single biggest ETF risk?
The single biggest risk in ETFs is market risk.
While there is no precise answer for the number of funds one should hold in a portfolio, 8 funds (+/-2) across asset classes may be considered optimal depending on the financial objectives and goals of the investor. Further, higher allocation of portfolio to the right fund is of crucial importance.
Keep earning money
This may seem obvious, but it's best to avoid withdrawing large amounts from your portfolio during a recession. When stock values have declined, selling shares to cover everyday living expenses can meaningfully eat into your portfolio's long-term growth potential.
Mutual funds have sales charges, and that can take a big bite out of your return in the short run. To mitigate the impact of these charges, an investment horizon of at least five years is ideal.
If a mutual fund scheme winds up or closes, the assets of the scheme are liquidated. Following this, the proceeds are distributed to the unit holders in proportion to their holdings, based on the prevailing Net Asset Value (NAV) after deducting the relevant expenses.
