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When is the right time to redeem the investments?

We always seek excitement and action in what we do, so is the case with investments. Every time investments generate decent amount of returns due to bull run in the stock market, we tend to think, “Should I start booking the profit and exit from the market”? We have also seen instances where some of the investors redeem the investments when the market crashes to cut the losses. So, what is the right time to redeem the investments?

Before an investor arrives at the answer for this question, it’s wise to answer the below mentioned questions:

1. Reason for withdrawal?

Ideally one should always map the investments to the specific financial goal (Retirement, Children’s higher education, foreign travel etc). Once the investments are mapped, they should be held till the financial goals are met.

For instance, generally the contribution towards Employee Provident Fund (EPF) is earmarked for the purpose of retirement. But some of us tend to redeem the EPF corpus while switching jobs. The reason for redemption could be anything (foreign travel, clearing credit card dues, down payment towards housing loan etc) but the EPF corpus is meant for the purpose retirement which shouldn’t be withdrawn earlier or utilized for any other purpose.

The funds invested or the SIP which is invested in should ideally continue till the goals are met.

2. Should I time the market?

In the earlier discussion, we have established the fact that in the long run timing the market doesn’t necessarily help. What matters is “time in the market”. So redeeming the funds to time the market is also not recommended.

At times we feel compelled to act when stock and commodity markets are highly volatile. As investors, we may want to book profits when markets have appreciated and invest more when stock prices have fallen. In such scenarios, one could look at the concept of tactical asset allocation strategy.

There is a school of thought which believes in following Price Earnings (P/E) ratio to take decision on asset allocation. Higher P/E ratio indicates that the stock market is expensive and there is probable market correction round the corner. A lower P/E ratio indicates an opportunity for an investor to invest in equity.

 The lower and higher Nifty P/E levels

 

Date

Nifty P/E

Date

Nifty P/E

1

27-Oct-08

10.68

11-Feb-00

28.47

2

12-May-03

10.84

8-Jan-08

28.29

3

1-Jan-99

11.62

12-Dec-07

27.69

4

24-Jun-04

11.82

13-Oct-10

25.91

5

13-Jan-09

12.16

23-Dec-99

24.22

Source: www.nseindia.com

A 30 year old investor looking to accumulate Corpus for the purpose of retirement has invested in the asset allocation ratio of 70:30 in Equity & Debt. If the current nifty P/E is 10.68, he decides to redeem 10% from debt and get into equity to take advantage of the lower P/E levels. At P/E levels of 28, the investor might look at reducing the equity exposure by 10%. This process of rebalancing is done to take advantage of market volatility.

But it is not important to time the market while looking at long term financial goals.

Note: It is not necessary that all the low P/E stocks are good investment avenues. The most important factor to be looked at is financial health of the company. 

3. Should I look for better a performing fund/Investment option?

Investments are not “Fill it, shut it & forget it”. Even though equity mutual fund investments should be held for long term, one has to review the performance of the funds regularly with the financial advisor. Based on the recommendation from the advisor, one can move out of the non-performing fundand move into other funds that meet the objective.

4. How much time left in reaching the financial goal? 

Equity investments are always perceived to be risky. Investors are generally worried that the stock market might crash just before they have to redeem the money from equity funds that were meant for a financial goal.

In such circumstances, an investor could look at moving out of equity investments in a phased manner and get into Debt or debt oriented hybrid funds which are considered to be relatively less risky. A 55 year old individual has been accumulating money towards retirement corpus for the last 25 years. She wishes to retire by 58 years which is three years from now. 33% (or 20% of equity over 5 years) of Equity investments could be switched out of the fund at the beginning of every year starting from today and switched into a Monthly Income Plan (MIP) or Short Term Income Plan kind of a debt oriented product.

While we tell investors to enter equity markets systematically, the same logic can be applied while exiting as well. Phased exit from equity in a systematic way would help the investor in insulating from sudden shocks of equity markets.

So finally, to answer to the main question as to when is the right time to redeem money, ideally one should look at redeeming funds only when the financial goals are to be achieved.  The funds invested in core portfolio are held till the financial goals are met but regular review is done to assess the performance. The outcome of assessment could be to decide whether to hold, buy or sell the funds. If an investor wants to take advantage of changing market dynamics, satellite portfolio could be used for changing the type of funds to suit the changing market conditions.

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Mutual fund investments are subject to market risks, read all scheme related documents carefully.