Maximize returns by exiting at the right time

Investing isn’t just about picking the right funds and products. Unless you are able to maximize your returns by exiting at the right time you wouldn’t be able to fully realize the fruits of your well thought out investment plan.

Even the best products are susceptible to the vagaries of the market and can make your investments look like duds in the short run. While timing the market isn’t something that average investors are good at, one can cut losses and benefits from market upswings by making exits at periodical intervals.

A systematic withdrawal plan (SWP) allows you to do just that. SWP is the opposite of systematic investment plan (SIP) and lets you to automatically redeem a predefined amount of your investments at regular intervals. With even dividends from diversified equity mutual funds (MFs) to be taxed at 5% under the new direct taxes code (DTC) investors can take the growth option and pull out the gains through an SWP.

SWPs will become more popular after the DTC comes into effect as it is tax neutral (not much change in tax structure). The biggest advantage with SWPs – like SIPs is that it eliminates the risk of timing the market.

Only if you try to time the market, you lose. With SWPs you neither exit at the opportune moment nor at the inopportune time and by this you can average out your withdrawals (from the corpus).

SWP is a good way of disciplined profit booking. Just like one has an investment discipline (through SIPs) a discipline in selling is also necessary.

However, SWPs unlike SIPs are not widely used by investors because they are more used to redeeming their units as and when they want. But inert investors may hold on the gains and cash out at the wrong time leading to losses say observers.

An SWP would help an investor to rebalance the portfolio ad reallocate cash to other efficient asset classes depending on market conditions, they say. But it has is downside as well. SIPs and SWPs are not sure recipes for success. These would lose out in a continuously falling market, says an industry official. With the markets trading within and one need to be careful about exercising such options say observers.

The amount to be with drawn through SWP is based on an individual’s requirements and the corpus invested. However, the fund house will set the minimum withdrawal amount while the maximum amount is entirely need based. The withdrawal frequency depends on the investor profile.

Pensioners and people nearing retirement an choose an SWP for regular cash flows by putting out their money on a monthly basis while younger investors make quarterly half yearly and annual exits . One can also stop SWPs is the market conditions are not ripe for making an exit.

But MFs do charge an exit load if the investment is redeemed within a specified period, which is usually 6 – 12 months. So make sure and plan an SWP that does not attract an exit load. As long as one avoids short term capital gains tax by staying invested for more than a year, redemptions won’t be taxing affair.

The compounded annual total return (expressed as percent per annum) in a mutual fund scheme represents the return to investors from a scheme, since the date of issue. It includes reinvestment of dividends and makes adjustments for bonus and rights. It is calculated on NAV basis or price basis. On NAV basis, it reflects the return generated by the fund manager on NAV. In this calculation, it is assumed that the dividend is reinvested at the NAV prevailing on the day it is paid. On price basis, it reflects the return to investors by way of market or repurchase price. In this calculation, it is assumed that the dividend is reinvested at the prevailing market or reissue price.