The withdrawals defeat the purpose of investing which is to generate wealth and benefit from the power of compounding.
By Dhaval Kapadia
I am 30 years old, self-employed and have been investing in mutual funds of diversified portfolios since 2017. Why is it not advised to redeem even if the NAV is at an all-time high?
Investors should ideally follow an asset allocation-based approach (mix of equity, debt, commodities, real estate, etc.) for investing towards one’s goal. Withdrawing any corpus would lower your portfolio value to the extent of the amount withdrawn and you might lose out on any subsequent gains on the withdrawn corpus that would have accrued till the end of your investment horizon. The withdrawals defeat the purpose of investing which is to generate wealth and benefit from the power of compounding.
Investors should stick to their long-term strategic asset allocation which in turn depends on their risk appetite (ability and willingness to take risk) and not try and time the markets. You can consider re-balancing your asset-allocation back to your recommended long-term asset allocation in case of any significant drift due to the recent sharp uptick in equity markets.
I am 32 years old and put Rs 4,000 every month in PPF and Rs 3,400 per month in UTI Nifty index fund direct plan growth option. Can I fulfil the goals like retirement in 2048 and child higher education in 2036?
Investors should ideally follow an asset allocation-based approach (mix of equity and debt) for investing towards one’s goal. Equities are the most favoured asset class for wealth generation over the long run with a potential to deliver superior inflation-adjusted returns compared to fixed-income. The PPF allocation is subject to lock-in and you can only withdraw partially before retirement subject to certain withdrawal rules.
You should ideally look to have some allocation to active fixed-income funds since these provide flexibility/ liquidity. Be mindful of the risks of investing in passive funds. Managers of index funds cannot protect the downside by moving away from a stock. You may look to invest with a mix of both active and passive funds which would provide the best of both—an opportunity to capitalise on opportunities via active management and limiting overall portfolio costs.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to firstname.lastname@example.org