Before redeeming your investments ensure that your financial goals have been achieved or are very near. A proper asset allocation plan will help you book profits in a systematic manner
As the Sensex reaches life-time highs and many investors make significant gains from the recent market rally, it is quite normal for them to think about how to book profit and cash out. Often investors are confused on whether it would be a good strategy to redeem their investments or to continue for a while. Before an investor arrives at the answer for the above question, it is essential to answer the below mentioned questions.
What is the reason for withdrawal?
Generally, investors should always map their investments to specific financial goals such as retirement, higher education of children, marriage of children, etc. As the investments are mapped, they should be held till the predetermined financial goals are met. The most common mistake that many salaried employees make is the misuse of their provident fund.
Their contribution towards Employees’ Provident Fund (EPF) / National Pension System (NPS) or any kind of retirement fund is earmarked for the purpose of retirement. But many people tend to redeem the retirement corpus while switching jobs. The reason for redemption could be for reasons such as clearing credit card dues, down payment towards housing loans, etc. But, any sort of retirement corpus is meant for your retirement which should not be withdrawn earlier or used for any other purpose.
Do you have a better-performing investment option?
Investments, either directly in equity or through equity mutual funds, should be held for a long term to reap a significant gain. It is very essential to review the performance of your equity/funds regularly. After a reasonable period of time, if you believe that a specific investment or fund is not performing up to the mark, then you can consider moving out of the non-performing fund and into other funds that meet the objective. It should be done after considering the various facts and figures. It is suggested to take help from a professionally qualified financial advisor in this regard.
Do you plan to time the market?
It is empirically established that in the long run, timing the market does not necessarily help. What matters is the right time to enter the market. Often investors fail to react when the stock market is highly volatile. You may want to book profits when markets have appreciated and invest more when stock prices have fallen. In such scenarios, you can use the concept of tactical asset allocation strategy. According to this school of thought, follow the price-earnings (P/E) ratio to make decisions on asset allocation. For instance, a higher P/E ratio indicates that the particular share is expensive and there is possible market correction awaiting at the corner. A lower P/E ratio indicates an opportunity for an investor to invest in equity. Thus, redeeming the investment/funds to time the market is also not recommended.
To conclude, before redeeming your investments ensure that your financial goals have been achieved or are very near. Have a proper asset allocation plan which will help you to redeem your investments and book profits in a systematic and methodical manner. Even after redemption, safeguard yourself financially with emergency funds, adequate health, and life insurance.
The writer is a professor of finance & accounting, IIM Tiruchirappalli