If you had invested in the Indian stock markets towards the end of April, you might be sitting pretty today. The Sensex has given returns of 21.99% in the last three months. In the past month, returns are well over 5%, which is much more than what you can expect from your savings account. Even the Nifty has given about 23% in the past quarter. The numbers seem to tell you that you can sell those investments that you hold. However, booking profits can never be based on the markets. Here’s what you need to do when you want to sell your investments.
#1 Take a look at your asset allocation
When the equities portion of your portfolio has exceeded the target asset allocation, then, it is the right time to sell. For example, if you had an asset allocation of 50:40:10 for equities, debt and cash and now that equities have run up, your allocation is 65:25:10, then you will need to sell some of your equity investments and put the money in debt investments to maintain your asset allocation. This is essential for the risk averse investors more than the risk-taking investors. Look at realignment if your target asset allocation has changed by more than 5%. This is because realignments come at a cost that includes transactions costs and capital gains taxes. However, if your asset allocation is just fine, you can afford to stick to your equity investments as they will give good returns in the long run – this is if you have chosen the right stocks and mutual funds.
#2 Consider your goals
It is prudent for an investor to make allocations based on the time horizon for their financial goals. If you have invested for the long term, you shouldn’t sell your equity investments. However, if you had invested for a medium-term goal and your goal is just a year or two away, then, this is the right time to sell off those equity investments and put them into debt investments to safeguard the capital and the gains from your equity investments. When you invest for the long term (that is more than 5 years), it doesn’t make any sense to book profits in a year or two.
#3 Evaluate your target portfolio returns
An investor should always look at reasonable returns from his/her portfolio. If the returns exceed their expectations, it is prudent to book profits in the asset class that has outperformed. If you want to achieve your financial goals, you have to book profits only after any of the asset classes have outperformed significantly. For example, let’s say you were expecting returns of 15% from your equity investments. However, they have given returns of 21%. Now, you should book partial profits and see if you need to put more money in equities or debt investments.
#4 Talk to your financial advisor
If you are an intuitive investor who thinks that there are certain stocks or mutual funds that have given stellar returns only because of the pandemic and may not outperform in the long run, talk to your financial consultant at Welathzi. They will be able to help you with market trends, industry data and fund information that can help you assess whether you should hold on to a stock or mutual fund. If some stocks or funds such as credit risk funds have gone out of favour, consider exiting them. They can help you invest in alternate asset classes if you are selling your investments. However, it is wise not to invest in asset classes that have already done really well. For example, the one-year return for gold has crossed 50% and investments in gold at this point may not yield reasonable returns in the long run. Your common sense and the consultant’s financial literacy will help you make the right investment decisions.
#5 Find out the value of your investments
The value of your investment is not the price of the stock or the Net Asset Value (NAV) of the fund. It is the value of the business for the former and the right portfolio for the latter. When a fund is underperforming when compared to peers or a stock seems to be running out of profits, you can consider selling the investment and look at investing in other stocks or mutual funds. You can even consider cashing in when the fund’s objectives change or the stock’s business isn’t lucrative anymore. So, when it comes to selling decisions for stocks and mutual funds, always assess the individual investments rather than looking at market trends.
Doubts? Wealthzi can help you. Get in touch with your consultant now.