As equity investments are subject to market risks, even after selecting good stocks, you may afford to spend only long-term money that you don’t need at a short notice in case of any emergency. This is because markets are sentiment-driven, and in case of a market crash, even the stocks of good companies having sound financial numbers may witness a fall in their prices.
So, in case you invest the money that you may need at a short notice, you may have to sell the stocks at a loss, in case a financial emergency arises during a market crash.
While, it’s said that one shouldn’t delay his/her investments to time the market, but one should be aware of when to exit.
To minimise the impact of market fluctuations on investments, it’s however better to avoid big investments in equity in lump sum and invest small amounts at regular intervals through the Systematic Investment Plan (SIP) especially in equity-oriented mutual fund schemes.
But for how long you need to keep your money invested in equity will depend on your financial goals.
So, it’s better to segregate your investments in different funds according to the investment needs to fulfill each financial goal individually.
This will make the exit decisions easier – as you may redeem an investment once the value of the fund reaches the target value needed to reach the financial goal associated with the particular fund.
To reach the financial goals quickly, you may take advantage of asset allocation, where investments are made in both equity and debt segments in a fixed ratio decided according to your risk appetite and investment needs.
When the ratio gets disturbed mainly due to fluctuations in the equity market, funds are shifted from one segment to the other to restore the ratio.
So, in case of market uptrend, the proportion of equity will become bigger and to restore the ratio, some funds have to be shifted from equity to debt, thus booking profit in the up market.
Similarly, in case of market downturn, funds will move from debt to equity, making investments in down markets.
Even to redeem an equity-oriented fund, the best time to exit is during a market uptrend.
“It is not necessarily a bad investment decision, if an investor books profit during an uptrend in the market. Investment behaviour is based on fear or greed. So instead of being a sentimental-driven investor, it is much better to be a goal-based investor. For example, if an investor wants money for traveling to Switzerland and invests Rs 5,00,000. He should exit the market once he achieves his targeted goal. However, while investing towards a retirement fund, it is important to do it for a long-term perspective. The amount of time spent in the market will bring cumulative benefits to the investor,” said Prashant Sawant, Co-founder, Catalyst Wealth.