Every time investments generate decent amount of returns in the stock market, one tend to think, “Is this the right time to book 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?
Let’s try to analyse how one can identify if it’s the right time to redeem or not :
- Reason for withdrawal?
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reason for redemption could be anything but the EPF corpus is meant for the purpose of retirement which shouldn’t be withdrawn earlier or utilized for any other purpose.
Similarly, the funds invested or the SIP which is invested in should ideally continue till the goals are met.
- Should one time the market?
At times, we may want to book profits when markets have appreciated and invest more when stock prices have fallen. In such a scenario, one could look at the concept of tactical asset allocation strategy.
Generally, Price-to-Earnings (P/E) ratios are considered to take decisions 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.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.
- Should one look for a better performing fund/Investment option?
Long term Investments once made must be reviewed timely with the financial advisor. Based on the recommendation from the advisor, one can move out of the non-performing funds and move into other funds that meet the objective.
- Time period left for completing the financial goal?
Investors are generally worried that the stock market might crash just before they have to redeem the money from the funds.In such circumstances, an investor could get into Debt or debt oriented hybrid funds which are considered to be relatively less risky and can move out of equity investments in a phased manner and. A 58 year old individual has been accumulating money towards retirement corpus for the last 30 years. She wishes to retire by 60 years which is two 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.
One must always inspect the above mentioned points in order to take a wise call before redeeming the funds.
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