The worst nightmare for a financial planner is investors refusing to exit stocks or mutual funds because of emotional reasons. “It is very difficult to do financial planning for such clients. We have to leave out good investments from asset allocation because the investor will not book profits or reallocate the proceeds,” says one.
He recounts this story of an investor who has accumulated 50,000 shares of Hindustan Unilever over decades. He refuses to part with these because the first tranche of 200 shares were bought from his first salary. Forget selling, he doesn't want to even demat these. He has rented two lockers with a public sector bank and wrapped the shares in a red cloth (traditionally important documents, books of accounts and physical shares used to be wrapped in a red cloth for auspicious reasons). His sons, along with the financial planner, are afraid that the physical shares may get destroyed. But he refuses to budge.
This is just one example. There are several reasons why investors refuse to exit stocks. As an investment planner adds, “Investors have emotional reasons like, first stock investment, first salary se liya or pitaji ne diya tha... all leading to a clutter when planning finances.”
| LEARNING TO MOVE ON... |
| * When asset allocation has to be maintained, sell stocks or debt, depending on performance |
| * When goals are approaching, exit equities and enter debt for safety of corpus |
| * When liquidity is needed, sell stocks after checking tax incidence |
| * When scheme is performing worse than peers, sell it |
But there has to be an exit strategy. Financial planners classify two main reasons for an exit strategy: One, strategic or personal, which could be goal-based, portfolio reallocation or liquidity requirement. Two, performance.
The first would include exiting when the goals are nearer. For instance, if you are saving for a retirement home or a child’s education a decade away. The obvious instruments would be mutual funds, preferably large caps and stocks for maximising returns. However, as the goal approaches, one needs to have an exit strategy from equities to move into debt, to ensure a safety element to the corpus. “The ideal situation would be moving money into debt two-three years away from the goal,” says planner Gaurav Mashruwala.
Then, there would be situations like rebalancing of a portfolio. So if the debt part has outperformed the equity part and the asset allocation has to kept static at 60:40 in favour of equities, there has to be some realignment, in the form of exiting debt instruments and moving to equities.
Liquidity can force one to exit investments. In such a situation, one has to carefully select instruments, whose returns will not be taxed. So, completion of one year for equities is a must, unless you are desperate and willing to pay short-term capital gains tax.
Exiting to raise liquidity is perhaps one of the most difficult things for an investor. Many times, investors are sitting on profits in gold or stocks but prefer to borrow to raise money. This is because they feel exiting a profitable stock or gold investment would hurt their portfolio. But do a cost-benefit here. Raising liquidity through shares or mutual funds is much better than paying interest to a bank.
Sometimes, investors are forced to exit stocks or mutual funds because of lack of performance.
“Normally, investors should choose schemes with a long term, say eight to 10-year record. After that, they should give two-three quarters to the fund to perform. If the bad performance continues, one should first stop giving the scheme more money. If it does not improve for three to four quarters, a decision to move the money has to be taken, even if it is at a loss,” says Mashruwala, adding that for newer funds or schemes, one will have to be more diligent.
