Eight Reasons to Sell a Mutual Fund

NEW YORK (TheStreet) -- It's almost always easier to buy a mutual fund than to sell one. Why? There are a couple of reasons. It takes time and energy to do the legwork-reading the fund prospectus, checking out the manager, reviewing performance and other data necessary to make an informed buying decision. Also, many do-it-yourselfers wind up investing not only financially but emotionally in their portfolios.

Once we've put in the hard work of putting together a well-diversified portfolio, we may have a tendency to "root for" the investments we've made and never develop a disciplined sell strategy. Of course, blind loyalty to a fund, no matter how sound the initial reasoning behind the decision to purchase it, won't pay the bills. It's key to any investment strategy to know when -- and, more important, why -- to sell a mutual fund. Below are eight reasons to consider parting with a fund.

1. Management Changes

Keep track of who's at the helm of your fund. The fund manager's investment experience, discipline and market feel have a great deal to do with the success of your investment over time. Although a change in management isn't in and of itself a reason to dump a fund, you'll probably want to monitor the fund's performance in the wake of a change at the top.

2. Expenses Go Up

Remember that expenses are the hole you have to dig yourself out of before you can start generating a positive return on your investment. For long-term investors who depend on the power of compounding interest to grow their nest eggs, even a small jump in expenses can make a big difference. If you're holding a money market or bond fund -- investments that tend to produce fairly steady returns over time -- there's even less chance that performance will improve to make up for the increased fees.

3. Consistent Relative Underperformance

No one likes to see a fund underperform the market, but before you decide to sell a laggard, make sure you're doing it for the right reasons. First of all, take the long view. Look at the one-, three- and five-year performance of your fund; underperformance over these periods is an obvious red flag. Before you pull the trigger, though, make sure to compare your fund's performance to other funds with similar holdings. Your industrials fund may be down compared to the S&P 500, but it could be at the head of its peer group.

4. Strategy Shift

Before you invested, you probably did some research to pick a fund that fits into your overall asset allocation program and risk profile. A change in fund strategy can undermine a carefully constructed portfolio. For instance, if you notice that your small-cap growth fund has begun adding mid- and large-cap shares, then consider moving into a fund that better fits your objectives.