Should Market Volatility Dictate Sale of Your Investment?
Most fund managers, in an effort to spike the return, even take a higher exposure in equity. But, you rebalance your portfolio when it turns riskier and market is volatile
As we write this, the Sensex is down around 13% (25,863 points) from its peak of 29,681 points that was reached on 29th January, 2015. The volatility has been rather pronounced from the beginning of the year and investors are nervous. Over this time, there have been various reasons being ascribed for this volatility – ranging from the tax authorities wanting to impose Minimum Alternate Tax on Foreign Portfolio Investors to geopolitical issues such as the terror strike in Paris to even an IPO boom in China!!
As we said, the reasons are varied and manifold. However, the effect is that markets are not stable. And the question is that if this is indeed so, should investors get out of (sell) their equity holdings (shares and mutual funds) in an effort to cash in on any profitable investments and stop loss in others?
The simple answer is no – in fact one should try and desist from succumbing to this classic investor behaviour. So when do you sell your investments? Read on:
Under Performance?
Investing is all about long-term. However, it has to be the right investment in the first place. Study the performance of your fund against their peer group and also the benchmark returns. Say your fund has gained 10%. While you may be happy, this doesn’t actually tell you much. To put the fund’s performance in perspective, you have to compare and contrast it against its peer group as also to the benchmark returns. Be careful in selecting the correct peer group. One should not compare an equity diversified fund against a sectoral fund or a large cap fund against a mid cap aggressive fund. Also, take care that you gauge performance over a reasonable period of time. Most information sources publish three month figures of fund performance. Three months is too short a time to come to any conclusion.
Moving on, another reason that you sell your investment is if it doesn’t remain the same investment.
Change in the fund composition
For instance, balanced funds earlier qualified with a 50% exposure to equity. Now, as per the new tax laws, at least 65% ought to be invested to equity. Most fund managers, in an effort to spike the return, even take a higher exposure in equity. But, you rebalance your portfolio when it turns riskier and market is volatile.
Change in the fund manager
Mutual fund companies will argue themselves hoarse that fund management is a process driven activity and the individual doesn’t matter. However, successful stock selection is a matter of experience, perspective and instinct. These are human qualities that cannot be completely reduced to a process. The fund manager’s exit is a red flag. However, it could also be possible that the new guy is better than the earlier one. So keep the fund under your radar. A discernible blip in the performance may mean its time for you to desert the ship too along with its erstwhile captain.
Realigning Asset Allocation
Every investor has his or her own risk tolerance. Say you are comfortable with 50% of your funds invested in equity. From time to time, you need to check the asset allocation. With a substantial run up in equities, chances are that your total portfolio has become distorted towards equity. To bring it back, you would need to sell. On the other hand, if the market falls precipitously, you would actually need to buy to realign the allocation. Thus automatically you would be buying low and selling high.
We have established so far that amongst all the reasons for selling your funds, falling or rising markets should in no way influence your decision. If anything, if markets start falling, please buy additional units — the cheaper deal will hold you in good stead eventually. However, what if you need the money? This then forms the foremost reason to sell any investment. Apart from must spends like for medical emergencies or say escalating education costs, do once in a while indulge yourself. Take that foreign trip that you so wanted. Buy your kid the iPad that s/he so badly desires….. You live only once and what is the point of earning money if you can’t pamper yourself or your loved ones once in a while? Like they say, if you have to do something wrong, at least do it right!
Written By: An Shanbhag and Sandeep Shanbhag
