3 questions answered about how to exit when financial goal is near completion

The correct strategy to withdraw money from your investments towards the end of your goal completion depends on a host of factors such as your personal situation; what works for your friend may not work for you

Kumar Shankar Roy Jun 17, 2020

Retirement goalThe nervous nineties is a commonly used term in cricket. It is felt by some batsmen when they have scored more than 90 runs in an innings but become nervous because of the pressure and desire to convert this into a century. The nervousness reaches such levels that often they start behaving in a completely different way in order to avoid getting out. And, then their nightmare becomes true when they are dismissed before scoring 100.

The nervous nineties situation has an uncanny similarity with what many investors feel when they are close to reaching a coveted financial goal. Many investors show the patience and discipline required to save huge amounts for a designated financial goal. Yes, there are people who over 20 years have built a retirement corpus of Rs 1-2 crore. Investors also show great maturity when it comes to relatively short-term goals such as saving Rs 20 lakh for child’s eventual marriage or for higher education purposes; such goals are achieved in 8-10 years.

But a common area where most people struggle is the exit strategy for these investments. Without proper thinking and a strategy to withdraw money from your investments can become a costly mistake made ironically towards the end of your investment horizon. In this article we will discuss the answers to three most important questions that investors ask about smooth exit when their financial goal is near completion. Keep reading.

Question 1 – When to start exiting investments when financial goal is near?

Answer – To reach your goal, you had selected and invested in various types of assets. Unless, you used only one type of asset, which by the way was a very high-risk move.

Exposure to an asset like equity, directly or indirectly, means a price risk. When you plan an exit by selling equity investments, you have to account for price risk, which may lead to lower realization than market value. Also, what a situation like March 2020 situation can happen when markets tank 20-30% in a short span of time. In 2008, Indian stock market fell by 52%.

In the case of your investments that exposed to large price risks, it is important to exit over a period like 1-2 years. The money realized must be put into a safe place like bank account so that you can fund your goal. Begin liquidating your equity investments 1-2 years ahead of goal completion. Yes, there will be an opportunity cost but that is any day welcome than a situation where a large part of your investment gain vanishes due to a large crash.

For real estate too, the realization process takes long time. If your capital for the goal is invested in a flat/land, begin 2-3 years ago. Buying real estate happens at a much faster rate than when you go to market to sell it. Since the transaction size in real estate is much bigger, it always takes time to find the right buyer and then finally realize the money after paper-work completion.

In case of fixed income assets, mutual funds promise daily liquidity i.e. exit. Money invested directly in unlisted bonds/debentures can be realised on maturity of that debt product. Bank deposits do offer daily liquidity but there may be penal fees for premature withdrawal. If debt security is listed, you may find buyers on listed platforms.

Question 2: Should tax be a consideration for exit strategy?

A: Absolutely yes. Taxes have a big role to play in your final goal corpus. Equity, debt, gold, real estate etc. are all taxed at different rates.

However, if your goal amount is close to being in risky assets, don’t delay realisation for tax breaks alone. Tax is a factor, but not the only factor.

One of famed investors in India once told a story of having made quite a bit of money from a stock ahead of 2000 dotcom bubble crash. The investor had gained 145% in 7 months. He waited for another 5 months so that equity gains would be tax-free (no LTCG tax then). In the next 4 months, the stock crashed. At the end of 12 months from investment, his position turned from +145% to -6%.

This anecdote tells that if you are near your goal amount or have crossed it ahead of goal date, don’t get greedy. Pay taxes and get your money. This is also true for debt/fixed income assets. If there is a lock-in, then you won’t be allowed to liquidate assets.

Tax and its effect on final returns are important but don’t make exit decisions on tax alone.

Question 3 – Markets are down. Should I begin my liquidation process now or hold on?

Answer – Your investment is supposed to fund a financial goal. Since you close to the goal, take a call if your goal can be postponed for sometime. If yes, you can hold on but do start liquidation process soon.

Just like you invested through ups and downs of markets, your redemptions will also be spread out. You cannot pin point the top of the market, neither can you pin point the bottom. So, you should do cost averaging while selling too.

If the market is bad today, you still have to fulfill your goal. Perhaps you can liquidate a lesser amount due to damp markets. If markets fall more, your waiting can back-fire. Yes, that risk exists.

One easy way to bypass this problem is by withdrawing only as much as you need for your goal. This is particularly relevant for a goal like son/daughter’s higher education or your retirement. You don’t need all the money at one go. You can do a systematic withdrawal matched with your needs.

Yes, in cases where all the money is required at one go like marriage, the flexibility to stagger withdrawal may not appear feasible. But, you can still do it by staggering withdrawals months ahead of final goal date. In this way, some portion of your funds will have potential to generate higher returns when asset market improves.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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