Should you book short-term profits on your SIPs?
“We don’t have to be smarter than the rest. We have to be more disciplined than the rest”.
- Warren Buffett.
In a volatile market, many investors see their portfolios as sometimes positive and sometimes negative. So, there are some investors who asked if should we book short-term profits on our investments or if should we hold them.
Read on to know what you should ideally do.
Why did you start SIP?
First, answer yourself why you have started a SIP. With what objective you have started your investments? Generally, people save and invest their money with long-term objectives like saving for a child’s higher education, retirement, buying a house, buying a car, etc.
Mostly we make investments to achieve our financial goals. The volatility in the market will always remain there, but we need to stick with our goals and investments.
When should you book profits?
Investments in mutual funds should be based on financial goals.
If you have achieved your financial goal, then you can book profits or redeem your units to utilize the amount for that specific goal, or you can book profits when you are near your goals, and you have achieved your financial target, or if your fund is underperforming.
In such scenarios, you can book profits. Majorly investments in mutual funds are for long-term financial goals. You should avoid booking short-term profits on your SIP.
Additional read: What are alternate investment funds?
What if the market crashes or falls?
In case, if the market crashes or falls, then should either consider it as an opportunity to buy at a lower level or remain invested with your SIP.
Don’t get fear out with the fall in the market. In the short-term, the funds or market may not perform, but in the long-term market has generated positive returns.
Nifty 50 Performance in 6 months and 5 years’ time frame
Power of Compounding
Compounding is basically earning profits on capital invested and profits as well. It’s like getting interested in interest and principal amount. The longer you remain invested the better compounding will work.
Let’s understand this with an example, suppose there are two-person A & B and both are planning for their child’s higher education, but A has 10 years to save and B has 20 years to save and both have invested in equity mutual funds.
Let’s see the difference in their savings amount.
In the above table, we can see that person A’s invested money has just got doubled but person B’s money has grown to 5x because he has more time to save for his goal.
The more you remain invested, the more benefit you will get out of compounding.
The wealth is created over a long-term period, not in the short-term. Consider investing with a financial objective and stick with your investments, don’t let the market volatility impact your decision.
Only redeem or switch your investment if your funds are not performing, else remain invested and let it grow.