The lady of the house accumulates gold, tola by tola, for decades for her daughter’s marriage.
The man of the house buys property, paying EMIs for decades, to be passed on as a legacy to his children.
They invest in insurance policies, paying premiums year after year for decades, with their children as the nominees.
Indians never sell their investment in gold, insurance and property (unless it is an emergency).
Sadly, the same levels of patience, discipline and commitment are missing, when it comes to their investment in equity mutual funds / stocks / ULIPs.
This is tragic:
Equity is like Wine. Both become better with Aging. [As far as equity is concerned, this is my personal experience. As far as wine is concerned, it is what I have heard, as I am a teetotaler.]
It is historically proven that, as the investment time-frame increases, equity (whether as shares or through mutual funds and ULIPs) delivers FAR SUPERIOR and HIGHLY CONSISTENT returns.
Property, gold, fixed deposits or insurance are simply no match to shares.
Therefore, equity should be the LAST — and not the First — in the queue, when you have to sell your investments to raise money for any of your objectives (e.g. marriage, education, house purchase, vacation, car, medical emergency etc.).
Don’t sell equity, just because it is easy to do so.
Don’t sell equity, just because you are tempted to book profits.
Don’t sell equity, just because of the mental block against selling gold or property.
There are primarily two instances, when you should sell equity viz. Portfolio Rebalancing and Portfolio Restructuring.
(Actually, here “sell” is the wrong word. It should logically be termed as a “switch”. Sell is when one totally redeems the investment for some need. Switch is when one is only moving the money from a particular investment to another.)
Based on your moderate risk profile, you put Rs.5 lakhs in equity mutual funds and the balance Rs.5 lakhs in debt funds i.e. an equity-to-debt asset allocation of 50:50.
Case 1: Over the next one year, say the debt market returns are 8% and equity 25%.
So your investment value now is Debt – Rs.5.40 lakhs and Equity – Rs.6.25 lakhs. Accordingly, 54:46 is the new equity-to-debt asset allocation.
This is risky as compared to your 50:50 risk profile.
Obviously, you need to “switch” some portion from equity to debt, to restore the balance. This is achieved by selling equity worth Rs.42,500 and reinvesting the proceeds in debt.
Case 2: Over the next one year, say the debt market returns are again 8%; but equity is DOWN by 15%.
So your investment value now is Debt – Rs.5.40 lakhs and Equity – Rs.4.25 lakhs. Accordingly, 44:56 is the new equity-to-debt asset allocation.
This is conservative as compared to your 50:50 risk profile.
Obviously, you need to “switch” some portion from debt to equity, to restore the balance. This is achieved by selling debt worth Rs.57,500 and reinvesting the proceeds in equity.
This process of shifting from equity to debt (or debt to equity) to maintain the balance between the two, based on your risk appetite, is known as Portfolio Rebalancing.
This is the 1st reason why you should sell (sorry, switch) your equity investment.
By the way, rebalancing is a great way to beat your emotions too.
Listed below are some of the key reasons why you may have to make the ‘switch’. By the way, ‘volatility’ or the market movement is NOT one of the reasons. So don’t sell just because the markets are up, down or stagnant.
Reason 1: Under-performance
It is but natural that if your share, mutual fund or ULIP is an under-performer, you must make a switch. If the returns are ‘consistently’ below par, as compared to the peers and the benchmark, it’s time to say good bye. There’s simply no reason to be stuck with the laggards.
Reason 2: Over-weight or under-weight
No two stocks or mutual funds will deliver the same returns. Therefore, over a period of time, the value of your investment in certain stocks or funds will either become too high or too low as compared to other securities in the portfolio. This intra-stock or intra-fund imbalance is not good for the overall portfolio and needs to be corrected from time to time.
Reason 3: Change in taxation
Whenever there is a change in the taxation policy, it is time to review your portfolio. It may so happen that under the new tax laws your tax liability has increased. As such, you may have to explore the alternatives where the tax incidence is lower, without of course comprising too much on your investment objectives.
Reason 4: Change in investment parameters
Management change in a company could either be good or adverse. This may require you to increase the exposure or exit the stock. Change in the fund manager is another trigger to review your investment decision. Fund size too plays an important role. In fact, on quite a few occasions even the investment objective of the fund has undergone a drastic change. These are among the many reasons for review and restructuring your investments.
[For more on this, you might like to read: 6 key triggers to sell mutual funds]
Concluding: Leave a really useful legacy for your kids. Don’t be bogged down by traditional views and customs. Your children would be far better off, if you are more reasoned and more rational in your approach towards equity.
The man of the house buys property, paying EMIs for decades, to be passed on as a legacy to his children.
They invest in insurance policies, paying premiums year after year for decades, with their children as the nominees.
Indians never sell their investment in gold, insurance and property (unless it is an emergency).
Sadly, the same levels of patience, discipline and commitment are missing, when it comes to their investment in equity mutual funds / stocks / ULIPs.
This is tragic:
Equity is like Wine. Both become better with Aging. [As far as equity is concerned, this is my personal experience. As far as wine is concerned, it is what I have heard, as I am a teetotaler.]
It is historically proven that, as the investment time-frame increases, equity (whether as shares or through mutual funds and ULIPs) delivers FAR SUPERIOR and HIGHLY CONSISTENT returns.
Property, gold, fixed deposits or insurance are simply no match to shares.
Therefore, equity should be the LAST — and not the First — in the queue, when you have to sell your investments to raise money for any of your objectives (e.g. marriage, education, house purchase, vacation, car, medical emergency etc.).
Don’t sell equity, just because it is easy to do so.
Don’t sell equity, just because you are tempted to book profits.
Don’t sell equity, just because of the mental block against selling gold or property.
There are primarily two instances, when you should sell equity viz. Portfolio Rebalancing and Portfolio Restructuring.
(Actually, here “sell” is the wrong word. It should logically be termed as a “switch”. Sell is when one totally redeems the investment for some need. Switch is when one is only moving the money from a particular investment to another.)
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| Your kid is watching whether you are leaving a legacy of equity funds or not. |
A. Portfolio Rebalancing
Suppose you have Rs.10 lakhs to invest.Based on your moderate risk profile, you put Rs.5 lakhs in equity mutual funds and the balance Rs.5 lakhs in debt funds i.e. an equity-to-debt asset allocation of 50:50.
Case 1: Over the next one year, say the debt market returns are 8% and equity 25%.
So your investment value now is Debt – Rs.5.40 lakhs and Equity – Rs.6.25 lakhs. Accordingly, 54:46 is the new equity-to-debt asset allocation.
This is risky as compared to your 50:50 risk profile.
Obviously, you need to “switch” some portion from equity to debt, to restore the balance. This is achieved by selling equity worth Rs.42,500 and reinvesting the proceeds in debt.
Case 2: Over the next one year, say the debt market returns are again 8%; but equity is DOWN by 15%.
So your investment value now is Debt – Rs.5.40 lakhs and Equity – Rs.4.25 lakhs. Accordingly, 44:56 is the new equity-to-debt asset allocation.
This is conservative as compared to your 50:50 risk profile.
Obviously, you need to “switch” some portion from debt to equity, to restore the balance. This is achieved by selling debt worth Rs.57,500 and reinvesting the proceeds in equity.
This process of shifting from equity to debt (or debt to equity) to maintain the balance between the two, based on your risk appetite, is known as Portfolio Rebalancing.
This is the 1st reason why you should sell (sorry, switch) your equity investment.
By the way, rebalancing is a great way to beat your emotions too.
B. Portfolio Restructuring
Since the economy, businesses and the debt / equity markets are highly dynamic in nature, it become necessary to review and re-evaluate your investment choices. And accordingly make necessary changes, if any, from time to time.Listed below are some of the key reasons why you may have to make the ‘switch’. By the way, ‘volatility’ or the market movement is NOT one of the reasons. So don’t sell just because the markets are up, down or stagnant.
Reason 1: Under-performance
It is but natural that if your share, mutual fund or ULIP is an under-performer, you must make a switch. If the returns are ‘consistently’ below par, as compared to the peers and the benchmark, it’s time to say good bye. There’s simply no reason to be stuck with the laggards.
Reason 2: Over-weight or under-weight
No two stocks or mutual funds will deliver the same returns. Therefore, over a period of time, the value of your investment in certain stocks or funds will either become too high or too low as compared to other securities in the portfolio. This intra-stock or intra-fund imbalance is not good for the overall portfolio and needs to be corrected from time to time.
Reason 3: Change in taxation
Whenever there is a change in the taxation policy, it is time to review your portfolio. It may so happen that under the new tax laws your tax liability has increased. As such, you may have to explore the alternatives where the tax incidence is lower, without of course comprising too much on your investment objectives.
Reason 4: Change in investment parameters
Management change in a company could either be good or adverse. This may require you to increase the exposure or exit the stock. Change in the fund manager is another trigger to review your investment decision. Fund size too plays an important role. In fact, on quite a few occasions even the investment objective of the fund has undergone a drastic change. These are among the many reasons for review and restructuring your investments.
[For more on this, you might like to read: 6 key triggers to sell mutual funds]
Concluding: Leave a really useful legacy for your kids. Don’t be bogged down by traditional views and customs. Your children would be far better off, if you are more reasoned and more rational in your approach towards equity.
