The ‘Exit option’: Use it judiciously to make money

The very essence of ‘Investment’ is to make money or create wealth. In this context, it is equally important to use the exit option (sell decision) judiciously as it is important to make an investment decision. Be it investment in stocks or mutual funds it does make sense to make a sell decision at the opportune time. The sell decision may result in a ‘profit’ or at times could result in a ‘capital loss’. The decision should always be influenced by the long term health of the portfolio. It is comparatively easier to book profits as one is taking money off the table. But, it is a painful decision to exit at a loss because nobody wants to destroy capital. But then, sometimes this painful decision needs to be taken if one is to protect the portfolio from higher risk in the future.

It is unfortunate that most advice is available to buy into a stock or a mutual fund, but seldom do we find advice to sell your holdings. Perhaps, it is not in the interest of the mutual fund company to give a sell call at the cost of running down its AUM (assets under management). Similarly, brokerages also focus more on buy calls and sell calls, if any, are put up for the short term traders only. Investors also tend to spend a lot of time on reading research reports, searching websites before taking a decision to invest. But seldom do we keep track of our investments to look for the appropriate time to exit or dis-invest. Does it mean that an investor should stay invested for a lifetime! Learning to use the exit option for ‘profit booking’ and at times for ‘loss booking’ is an art which every investor must learn.

Here are some key factors an investor must analyse in order to exit his/her holdings (individual stocks or mutual fund schemes):

• Relative performance: If the stock/ MF is under performing vis-a-vis its peers it is a time to take an exit call. The YOY (Year to year) and QOQ (quarter on quarter) performance based on declared results helps an investor to take this decision.

• Unrelated diversification: The announcement of an unrelated diversification, deviation from stated objectives in case of MF, puts pressures on the performance of the company. It should be analysed in terms of future profitability to arrive at the exit option. On the other hand backward/ forward integration of businesses helps in consolidation.

• Achievement of target: Most investors take an investment decision based on a specific target for the particular investment. If your favourite scrip has achieved its price target, it is advisable to book at least partial profits in the scrip.

• Negative news on the company/ MF scheme: Any negative news on the company/ MF should be viewed with suspicion. For example, detection of a fraudulent practice by the company, change in Fund manager of the MF scheme, should be analysed for the future impact, and an exit call taken after due analysis. In this case even ‘loss booking’ would be advisable’.

• Long term trends: Although, it is said that investors should not time the market, it is worthwhile to study the long term trends for the markets. Disturbing macro factors, uneasy economic situations invariably have a negative impact on risk assets (equity markets in particular). Such a situation should be used to press for the exit option. This gives an opportunity to sell now to buy cheap later.

Remember, equity investment is undertaken for ‘wealth creation’, one must take necessary steps to avoid ‘wealth destruction’. Exit option is a means towards achieving this objective.