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Is it a good idea to redeem funds when the market is down?

Should I take out my money when stock market is down

With the COVID-19 pandemic, the world economy is struggling and markets are crashing like never before. This has caused a sense of fear and panic among investors. Most of the investors are contemplating their next move- should the funds be redeemed? Or stay invested? Or invest more?

Before delving further, let’s first look at some facts.

  • Since January 1, 2020, the BSE Sensex has dropped 33%

  • Since January 1, 2020, the Nifty 50 Index saw a 33.6% drop

  • Many equity fund investors have also seen a drop of 20-40% on their investments since January 1, 2020

  • Investors who have stayed invested for a year are earning returns between 5-14% while many debt fund investors are gaining returns between 1-4%

All this shows that equities have been greatly affected. Even if your portfolio includes 50-50 debt-equity funds, the returns from debt is not balancing the losses from equity. It also means that if you redeem now, you will incur losses of at least 15-20%.

To avoid such a huge loss and reduce risks, you can choose to stay invested or invest further to diversify your portfolio. By staying invested, your losses could be far less and recovery will be faster.

So, should you redeem your funds?

Before you think of redeeming your funds these are some points that you need to consider;

1. If you have invested a lump sum amount

It’s a well-known fact that the performance of a lumpsum investment depends on the market conditions at the time of buying the funds.

However, the pandemic has thrown everything off gear and you will now be forced to reconsider your investment.

Two things that you need to consider are;

  • Until you redeem your investments, remember, your loss is on paper or a notion. However, if you redeem the funds, your losses will become real. Depending on how long you have been invested, redeeming your funds at a loss (unless the securities have some basic issues) only means losing money as well as the opportunity to earn returns on the invested money.

  • If you made a lump sum investment for the long-term, it will do you no good redeeming your funds now. God willing, this crisis will get over soon and the markets will recover and make up for the losses. If you stay invested till then, you can recover your losses and even make some profit.

2. If you made a SIP investment

Systematic Investment Plan or SIP as it is commonly known is designed to help investors invest regardless of the market volatility. In this scheme, you invest a fixed amount at regular intervals. Therefore, you get more units when the market is down and less when the market is high. Over time, the costs average out and the price per unit lowers. This helps you earn better returns.

Considering that you have been investing in mutual funds via SIP for at least a year, the markets were volatile in the last two months, the drop has been steep. So, if you continue your SIP investments, you will be able to buy several units for the same price.

So, if you continue investing via SIP and the markets recover, you will have several units on hand which will help recover your investments faster and possibly earn profits. Summing up

COVID-19 pandemic and crashing markets are bound to cause emotions to run high. However, emotion-based decisions can be detrimental and cause you to incur more losses. Therefore, it is recommended that you get a grip over your portfolio and redeem only if you really need it.

You may consult an experienced financial advisor and formulate a strategy to sail through this crisis.


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