In order to write a happy ending you should know where to end your story. The same holds true in case of investments. To get most out of your investments you need to know when to redeem them. This is because, how well a particular investment fares for you depends on how much money you made by selling the said investment.
So, clearly your decision regarding disinvestment is as important as your investment decision. Therefore it makes sense to have an exit strategy in place in order to make the most out of your investment. This exit strategy will help you base your redemption decision on specific and valid reasons and will not let emotions like panic or greed takeover.
Before going into the right reasons for redemption, let me point out two of the most common but completely wrong reasons of redemption:
- Cutting Your Losses
- Safeguarding Your Profits
If you are using any or both of the above reasons for withdrawing money from your investments you are doing nothing but trying to time the market. You are not thinking rationally and are letting emotions cloud your judgment. As I wrote in an earlier post, never try to time the market. Give your investment some time and it will recover from losses on its on.
Now coming to valid reasons for disinvestment. Like investment, redemption reasons should always be personal and specific to your current situation.
- When you need the money
If there is an emergency and your contingency funds are falling short, you should withdraw from your investment. It is advisable that when you have multiple investments and need the money, you should withdraw from the most appropriate investment after taking into consideration the exit load, tax implications, current value of investments etc. But even if all your investments are currently at a loss, it’s still sometimes a better option to redeem your investments, instead of falling into a debt trap – like mounting credit on your cards or taking loans.
- For your short term goals
If you were investing for a particular short term goal like an overseas vacation or buying a new car and have accumulated your desired amount, you should certainly withdraw the said money and live your dream. Don’t wait for earning a little extra, because in a volatile market you never know when your investment might take a nosedive. Never let greed turn your investment into speculation because it can stop you from fulfilling your goals.
- For your long-term goals
When investing for an important long term goal like your child’s education, you should start shifting your money 1 or 2 years prior to your actual time of need from unstable equity funds to stable debt funds. This strategy will make sure that you have the required amount of money when you need it the most. If the market tanks around that time it will not have any major impact on you as you have already placed your money in a safer category of mutual funds.
- When your risk profile changes
If your risk appetite has changed over time due to personal circumstances – be it due to age, increased responsibilities, changes in career – it is advisable to re-visit your investments and make necessary changes. Like withdrawing from high-risk funds and parking money in low-risk funds or vice versa.
- Under-performing fund
If your selected fund has underperformed consistently when compared to its set benchmark or even its peers, it could be a better decision if you exited from the said fund and invest your money in a better performing fund. Just keep in mind that this low performance should be judged only if it has been consistently performing poorly for at least 2 – 3 years. Short-term performance should not be the deciding factor.
- Fundamental changes in fund
Sometimes mutual funds undergo major changes like changing their benchmark, or changing their investment approach, or suddenly taking on more risk – like becoming a small & mid cap fund from a mid cap only fund. Bear in mind that change is not always bad, but if you think your risk appetite or investment goal has begun to differ from the fund’s investing strategy then you can redeem your units and shift to a different fund.
Your selling decision is the most important part of your investment journey, make sure that you sell for the right reasons.