Investment doubled! Should you redeem?

25 din me paisa double! Who doesn't want to hear these golden words for their investments.

But when it does happen - when your paisa (investments) actually gets doubled, should you take your money out and book profits, especially during this time when the market is at a new peak?

Well, that depends. Read on.

Redeem if you need the money or have achieved a financial goal

If your investments have reached your desired amount for a specific goal, such as buying a house or funding your child's education, you can consider redeeming them.

Furthermore, redeeming investments also makes sense when you have an imminent expense and require funds for it.

Never redeem out of fear of a market crash

A common investor mistake is selling investments out of fear of a market crash. While market volatility is inevitable, history has shown that markets tend to recover and grow over the long-term.

For instance, the Sensex dropped about 35 per cent during the 2020 COVID pandemic but rebounded about 80 per cent by year-end. So if you redeem out of fear, you can miss out on potential future gains (opportunity cost).

Where else will you invest?
But if you still want to redeem your investments out of fear, where else will you invest? Equity is the only asset class that can generate inflation-beating returns in the long-run.

For instance, you invested Rs 1 lakh in an equity fund that has doubled to Rs 2 lakh. If you choose to redeem it and invest it in a 'safe' investment such as the FD at 7 per cent instead of continuing the investment (which historically yielded 12 per cent), you are missing out on significant growth.

Point to remember

• Redeem investments only when they have reached your desired amount or you need money imminently.
  
• Stick to a defined asset allocation to weather market ups and downs. Asset allocation helps manage risk and enhance returns.
  
• Rebalance your portfolio regularly to maintain your desired asset allocation.

Here are a few indicative asset allocation strategies based on risk tolerance:

• Conservative: 30-40 per cent equity funds, 60-70 per cent debt funds
  
• Moderate: 40-60 per cent equity funds, 40-60 per cent debt funds
  
• Aggressive: 70-80 per cent equity funds, 20-30 per cent debt funds

Do note that these allocations are not one-size-fits-all solutions. They need to be adjusted according to the investor's age, risk tolerance, financial goals, and investment horizon.

Also read: When should I exit my poorly performing mutual fund?