- According to a poll by ET Wealth, more than 16% of respondents are looking to cash in while an overwhelming 60% of those considering selling right now are doing so for fear of a correction.
- The peak of domestic inflation and the slow pace of vaccination in the country are playing on the minds of investors.
- If you quit now and the market continues to hit new highs, would you feel left out?
New Delhi: The recent stock market rally, which has seen benchmarks hit record highs recently, has put equity investors in a dilemma as they are unable to decide whether to hold onto their investment or record profits as there is has a lot of noise in the market regarding an imminent correction. While some investors are showing signs of FOMO for fear of missing out, others fear the markets are overheated and ripe for a correction. According to a survey carried out by AND Wealth, over 16% of those surveyed are looking to cash while an overwhelming 60% of those considering selling are doing so fearing a correction.
But before hitting the exit button, investors should look past the emotional reasons for making a profit. Experts insist that those considering an exit should ask the right questions before hitting the sell button. Without the proper framework, selling decisions can be costly to the investor. Here are five questions investors should ask themselves before cashing out.
Do you get carried away by the noise of the market?
Part of the investment community believes that market valuations have peaked and that global central banks like the US Federal Reserve and others may soon begin to ease easy monetary conditions, leading to a correction in emerging markets like India. In addition, soaring domestic inflation and the slowness of vaccination in the country are playing in the minds of investors. Some of these reasons may be justified, but before acting on these noises, ask yourself if this is the main reason for your move. If there aren’t other compelling reasons for you to sell your investments now, noise is probably the driving force. Before succumbing to correction fears, ask yourself this question, Amol Joshi, founder of PlanRupee Investment Services, told ET Wealth: “If you exit now and the market continues to hit new highs, would you feel excluded ? If the answer is yes, you will probably have to dig deeper.
What will you do with the profit recorded on the shares?
Experts say accounting for earnings in equities now makes sense if the critical financial goals attached to the investment expire within the next 12-18 months. If you have already reached your target corpus and want to use the amount for purposes such as raising children, getting your daughter married, or for your retirement, which is due in the next 12-18 months, you shouldn’t not think twice before hitting the sell button.
If there are no such plans and you’re only going to keep the unused money in your bank account with no expenses planned, you could end up spending the money on things you don’t really need. Why not let the investment run instead?
Is your equity exposure greater than the desired allocation?
Beyond your immediate need for cash, another critical factor to consider is your asset allocation. The rise in the market over the past year will result in many portfolios in a much higher equity allocation than before. For example, a 50:50 allocation in favor of fixed income and stocks at the market low last year would now skew around 75:25. If the current asset mix is beyond your comfort zone, it makes sense to reserve a profit on your investment in stocks and redirect that amount to fixed income. But if the asset allocation is within acceptable limits, a higher price or valuation alone is not a compelling reason to exit stocks. “Anticipating a market peak or trough is virtually impossible. Respect for the chosen asset allocation must be the guiding principle at all times ”, AND Wealth quoted as saying Ankur Maheshwari, CEO, Wealth Management, Equirus Capital.
Are your stocks or equity funds underperforming the market?
Despite the market rally, not all stocks and funds have performed well or have failed to match their sector or benchmark respectively. So it is highly likely that you will find stocks or equity funds in your portfolio that have been left behind. If you’re looking to reduce your exposure to equities, these are good candidates for the chopper. But don’t just rely on recent performance. If the funds or stocks have been underperforming for a long time (more than three years), you can reduce the exposure to those stocks or funds. “Any performance evaluation must be done from a long-term perspective. Even three years is too short to judge equity funds, as strategies come and go against this period ”, AND Wealth quoted as saying the mutual fund distributor Rushabh Desai.
Throw out only the chronic latecomers who have always done poorly. On the other hand, a few stocks or funds may have fallen behind simply because market preferences have shifted outside of certain styles or themes. The underperformance can only be transitory, says the publication.
Have you taken into account taxes and other charges?
Before you subtract your investment in stocks, you should take into account taxes and other charges. Importantly, if you’ve made most of the gains in the past year, you need to factor in short-term capital gains tax and exit charges. If someone exits within a year of investing, they are subject to a short-term capital gains tax of 15% on all earnings, in addition to other costs such as brokerage and STT. When selling shares of equity funds, you may also incur an exit charge of around 1% of the total proceeds. After you add up the costs, you might find that the sale doesn’t make sense, for no other reason.