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When to review, reallocate or sell equity investments?

While it is advisable to invest in equity for the long term, investors must also know when to redeem or reallocate

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As a wealth manager, friends as well clients often ask me, "What is an ideal holding period for an equity investment?" or "I have made very handsome returns in my equity portfolio last year, should I consider booking profits and locking these gains?"

In my opinion both the above questions warrant an explanation around a commonly interchangeably used concept of "review period" and "holding period" in any investment in general and for equities in particular.

As the legendary equity investor Warren Buffet once said "Our favourite holding period is forever", I keep reiterating to all my clients and friends that decision to exit from an equity investment should not be based on returns or number of years of holding, but on the premise and principles on which the investment was made at the first place.

When not to exit

If investments in equities were made as an Systematic Investment Plan (SIP) to encourage regular savings from salary/earnings and the route chosen was a well diversified and an established equity MF with a long-term track record, the redemption period could possibly be never.

Similarly, if a fund was chosen with a long-term goal of 15% compounded returns, to create a corpus over 10 to 5 years, the answer to the question "My fund has delivered more than 25% returns every year for the last three years, should I sell it now and stay in liquid?" is also a "NO". Even the news around fund manager leaving a MF does not necessarily warrants a "sell" call from one's investment in that fund.

Review is essential

While the answer to all the above situations is a "No" for exit from equities, this does not in any way imply that these situations do not warrant a review. These situations are classic cases where one should review their investment and re-validate their argument for equity manager selection and/ or equity allocation in their portfolio.

Not only these external triggers will an investment need a thorough review, but any material change in one's life – like a new job, a new baby or a windfall gain also warrant a relook of one's portfolio.

When to reallocate, exit

Achievement of a defined goal, often based on completion of a time period or reaching an expected corpus, is often the most compelling reason to redeem from equity. In fact, rather than expose the investment to a single exit-point market risk, it is advisable to stagger redemption over six to 12 instalments through Systematic Withdrawal Plans (SWPs).

Consistent underperformance by a fund manager, especially to peers, for more than 18-24 months on a rolling two to three year returns basis, could be another reason to move out from a fund. Change in fund manager or exit of a manager without a very clear succession plan or a back-up team to fill in his/her shoes is another reason to consider a switch.

An investor might consider exit from his equity funds also on emergence of an alternative idea, which seems more compelling and fits better in overall portfolio, based on expected returns and complementary/ low correlated attributes to existing portfolio. At times, with no fresh liquidity in hand, switching from one to the other idea is the only prudent option available.

Don't just get out of equity after a fixed period of holding or on the basis of past performance. Answering certain questions can help you arrive at the decision:

What am I going to do with the redeemed funds, is there a defined end use of the proceeds? Is my return expectation or tenor for need of the said funds any different than if they remain invested? Has the fund manager fundamentally changed his strategy or has the market become highly valued on conventional metrics? Is there a very compelling new opportunity, which I want to participate in and for which I do not have liquidity currently? Has my life goals or financial situation /profile changed substantially

The writer is managing partner and head-family office, at ASK Advisors

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