When to exit an investment?
I hold mostly Etfs and mutual funds. One decision I struggle to make, is when to exit an investment. Say if my goal is long term compunding, should I be holding for life till I actually need the money or should I book profits now and then (with criteria like once an installment generates 25% or once valuations turn expensive), sit with cash and reinvest once valuations become fair? Which is the better approach for compounding in the Indian markets?
If your goal is long-term compounding, the default approach should be to stay invested.
With ETFs and mutual funds, especially diversified ones, time in the market usually beats timing the market. You can check this blog post for a more detailed explanation of it.
Frequent exits and re-entries can hurt because if you are not able to time the market perfectly, you will get a return that is far below expectations. In doing so, we can miss rallies, face income tax impacts, and most of the time, we end up buying a falling knife in such situations.
What is the best way to manage?
- Think deeply before investing,
- Do your own analysis,
- Buy quality equity at the right valuation, and
- Let it (equity) stay for years undisturbed.
This logic is more applicable to ETF and Mutual Fund investors.
That said, you also cannot hold blindly forever (especially individual stocks).
You exit when the reason you invested changes.
For example, if the fund’s strategy deteriorates, costs rise, or it consistently underperforms its benchmark, it may no longer deserve your money.
Also, as you approach your financial goal (like retirement or buying a house), gradually reducing equity exposure makes sense.
Booking profits just because you hit 35-50% gains or valuations look expensive is usually not a reliable strategy.
