SynopsisIf you find that any of the eight conditions is being met, you can safely exit. Our intention is not to change your decision or prod you to stay put. We only want to ensure that your exit decision is for reasons beyond merely second-guessing the market direction.
As stock markets soar to new highs, they pose dilemmas for investors. Some investors are showing signs of FOMO—fear of missing out. An ET Wealth poll of over 2,480 respondents reveals that two out of five investors are looking to buy stocks or equity funds. And one out of four of these bullish investors is doing so out of fear of missing out on further gains. At the other end, fears of an imminent market sell-off is keeping many investors on the tenterhooks. There are concerns that the market is now overheated and ripe for a correction. Some fingers are now itching to exit the market. Over 16% of the survey respondents are looking to cash out. An overwhelming 60% of those thinking of selling right now are doing so fearing a correction. But is the market direction alone the right reason to sell?
To be sure, the market may or may not correct anytime soon. It is usually futile to time the market. Investors need to look beyond emotional reasons to pull out. Experts insist those pondering an exit should ask the right questions before pressing the button. Without a proper framework, sell decisions may cost the investor dearly. Renowned fund manager Peter Lynch once observed, “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”
In this week’s cover story, we list eight questions that one should answer before selling stocks or equity funds. If you find that any of the eight conditions is being met, you can safely exit. Our intention is not to change your decision or prod you to stay put. We only want to ensure that your exit decision is for reasons beyond merely second-guessing the market direction.
Is the market noise playing on my mind?
There is no dearth of noise around the sky-high valuations in Indian equities. Concerns abound regarding the likely unwinding of easy money conditions by the US Federal Reserve and others, further spike in domestic inflation and slow pace of vaccination in the country, among others. There will always be chatter around global and domestic events. Some of it may be justified, some of it not. The key is how much of it is playing on your mind. Don’t let market noise occupy a disproportionate share of your mind space. Before acting on headlines, ask yourself if it is the primary nudge behind your next move. If there are no other compelling reasons for you to sell your investments now, the noise is probably the driving force. Before succumbing to fears of correction, ask this of yourself, suggests Amol Joshi, Founder, PlanRupee Investment Services: “If you exit now and the market continues to make new highs, would you feel left out?” If the answer is yes, you probably need to dig deeper.
Do I need the money within next 1-2 years?
If you exit now, you will likely convert your paper profits into a tidy sum of cash. Your bank account will look nicer. But do you actually need that money now? If critical financial goals tied to that investment are falling due soon, you don’t need to think twice. Equity funds earmarked towards funding your child’s education starting in the next 12-18 months should be taken off the table now. If the target outlay has been achieved, a complete exit makes sense. If not, instead of emptying the entire pot, you may consider a staggered exit. This will allow you to continue to benefit from any further uptick in the market as your goal nears. If you are only letting the proceeds lie idle in your bank account without any planned expense, you may end up spending the money on stuff you don’t really need. Why not let the investment run instead? “You only pluck a mango when it is ripe,” argues Santosh Joseph, Founder and Managing Partner, Germinate Investor Services. “This should apply to your investments as well.” Unfortunately, our poll indicates that only 4% of those who plan to sell have immediate need for the money.
Is my equity exposure above the desired allocation?
Beyond your immediate need for money, another critical factor to consider is your asset allocation. The market uptick over the past one year will be reflected in many portfolios in a much higher equity tilt than before. For example, a 40:60 allocation in favour of fixed income and cash at the market bottom last year would now be skewed towards equities at 56:44. If the current asset mix is beyond your comfort zone, taking some risk off the table is the need of the hour. It would be prudent to pare equity exposure and redirect towards fixed income or some other stable avenue. But if the asset allocation is within acceptable limits, higher price or valuation alone is not a compelling reason to exit stocks. Our poll shows that only 5.2% of those selling now have asset allocation in mind. “Pre-empting a market peak or bottom is next to impossible. Sticking to chosen asset allocation has to be the guiding principle at all points of time,” asserts Ankur Maheshwari, CEO, Wealth Management, Equirus Capital. Feeling comfortable with the higher equity allocation? Beware! Your sudden higher risk appetite now may simply be induced by the one-way ride offered by the market since March last year. An accurate assessment of own risk appetite for most is best captured during a market downturn.
Is the stock or equity fund underperforming market?
The upward march of the stock market has lifted most boats. However, you may find some stocks or equity funds in your portfolio that have been left behind. Some would have underperformed the industry or category peers, and may be a drag on your portfolio. If you are looking to prune your equity exposure, these are good candidates for the chopping block. But don’t simply go by the recent performance. The cull is warranted if the funds or stocks have been laggards for a time period extending beyond recent market uptick. Mutual fund distributor Rushabh Desai insists, “Any performance evaluation has to be from long-term perspective. Even three years is too short a time frame to judge equity funds as strategies go in and out of favour in this time span.”
Throw out only the chronic stragglers that have consistently fared poorly. On the other hand, a few stocks or funds may have lagged simply because market preferences rotated out of certain styles or themes. The underperformance may only be transitory.
A long time horizon compensates even for worst entry points
Even if you had invested right before major market declines since 2000, your investments would have fared well.
Return as on 30 June 2021. Figures represent returns of lumpsum investments in Nifty 50 TRI; Inflation figures are based on cost inflation index. Source: FundsIndia Research
Have company fundamentals/facts or fund attributes changed?
Apart from the performance aspect, the underlying business or fund characteristics are key variables to consider. At the time of investment, you would have selected a particular stock for its superior earnings visibility, return ratios or expansion plans. Similarly, a fund may be in your portfolio for its particular investing style, mandate or a reputed fund manager. If the thesis regarding the chosen business proves wrong or the fund attributes change unfavourably, there may no longer be any reason to hold the stocks or equity fund. But in the absence of material changes in the company fundamentals or fund characteristics, exiting the investment may not make sense. Give due weightage to this aspect before sacrificing the stock or fund at the altar of valuations. Bhushan Mahajan, Founder, Chairman & Managing Director, Arthbodh Shares and Investments, exhorts investors to make a distinction between the men and the boys before rushing for the exit door. “Consistent compounders may see intermittent corrections, but can continue their run in the long term. These can be held across market cycles.”
Are the stocks/funds past their shelf life?
Not all stocks or equity funds can qualify as long-term bets. Some investments have a limited shelf life. These may be thematic in nature, where the investment thesis plays out in a short span of time. These do very well when the cycle turns in their favour. However, the story can take a dramatic turn within a few years. Such time-bound bets are best played as tactical investments. Be ready to make a swift exit from the stock or fund once the gains are captured. “Lock in profits in sectors where fundamentals have changed or the story has played out. It is a good time to book profits in cyclical sectors now,” points out Mahajan. Metals stocks, for instance, have enjoyed a sparkling run for the past few months. The commodity reflation trade is still in play but will not last forever. Investors may start booking profits and move to safer shores.
Have I accounted for all the costs?
Booking profits may look very appealing now. But have you accounted for the accompanying costs of executing such a transaction? Are you prepared to bear that cost? Don’t just focus on the absolute gains you make on the sale. Ascertain what you will get after taxes and other levies. Investors who have made smart gains over the past few months particularly must do the math carefully. “Pay heed to impact of capital gains and exit loads. If you invested any time after last July, you are likely exposed to both,” observes Joshi. Indeed, someone who is exiting within a year of investment faces a tax of 15% on the entire gains. This is apart from the usual brokerage cost and other levies like STT. When selling units of equity funds, you may also incur an exit load of around 1% of the total proceeds. After you add up the costs, you may discover that the sale does not make sense, in the absence of other reasons.
Am I holding too many stocks or funds?
A bloated, unwieldy portfolio may also need a nip and tuck at some point. If not checked in time, the size can become a noose around your neck. It will take more of your time than is necessary. If you don’t know how each component is doing, chronic underperformers are likely to escape scrutiny and remain a drag on the portfolio. A soaring market is actually a ripe setting for consolidating a bulky portfolio. “This is a good time to prune your holdings to a more compact size,” asserts Desai. A portfolio review during a correction or at the depths of a market crash is probably the worst timing. At that time you will pick faults in your investment choices and chop and change unnecessarily. But you are likely to take a more objective view when the portfolio is in a better shape as a whole. You may use this time to reassess the utility of some of its constituents. But ensure you are not chopping for the sake of it. Cut anything that is not adding value to the portfolio or adding unwanted layer of duplications, apart from chronic underperformers.
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