Want to sell? Read this first

By Morningstar |  12-04-20 | 

We have been getting numerous questions from readers. If we had to narrow it down to a few that capture the confusion in everyone’s mind, these would be it:

Would it make sense to protect capital by selling my investments in equity funds and putting it in a fixed deposit?

Is this a good time to enter mid-cap funds?

Which mutual fund category is best suited for lumpsum investment at this point in time?

Equity markets in India and across the globe have corrected sharply on concerns over global growth amid the coronavirus outbreak. India was not excluded. The market fall has resulted in significant underperformance.

The correction has taken place across market-caps (large/mid/small cap). Index funds too have witnessed drawdowns similar to most other equity funds. Growth and value funds too have been hit. In fact, the value fund category, on the whole, has underperformed since 2018.

So be it growth or value, or ETFs or index funds, or various market caps, all have been hit.

As explained in How moving to cash will hurt your portfolio, the best thing investors can do when contemplating change is to reflect on their goals.

Ask yourself:

  • Given where I am now, what actions move me closer to my long-term goals?
  • Would an investment-change jeopardize the original plan for reaching my goals?
  • Has anything fundamentally changed in the investment?
  • Has anything fundamentally changed with my goals?
  • Has anything fundamentally changed with my strategy?
  • What would be the tax implications of me selling?
  • If I sell, where must I put the proceeds? The investment I pick, will it make me push my goals further?

No doubt losses are painful. But knee-jerk reactions can induce a person to act rashly and make things worse in the long run. If something has fundamentally changed, write it down; then balance this by stating what it might mean if you’re wrong.

You may realize that you are reacting to plain disappointment and fear. This article will be a useful guide to keep you grounded: 5 things an equity investor must remember.

As for the decision whether this is the right time to get into mid or small caps, one cannot generalize. If you are saving for retirement 20 years down the road, by all means consider. But if you are eight years away from retirement, it may not be a wise call. It also depends on the rest of your portfolio. Is it already heavy on smaller fare? If yes, then there is no need to add to it.

 Do remember these points:

  • Equity markets never move in straight lines. The idea of a perpetually rising stock market is deeply flawed.
  • Stop thinking in terms of a bull or bear market. Think in terms of market cycles. Given that markets are cyclical in nature, it’s important to stay invested over the long term to ride out the cycles. This way, you average out returns and achieve a positive outcome.
  • Use the principle of regret minimization when facing trade-offs: Do I sell or hold? Do I buy or wait? These questions can only be answered at the individual level. You need to answer: If I end up making a mistake, which mistake will I regret less?

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