“Wow, my money has gone up by 20% in just 3 months! Guess I should make these gains safe.”
When we see our money grow all of us feel joy and the next thing we feel is an impulse to act to protect the growth. It’s a natural human reaction.
For those new to investing, this impulse of protecting your gains can feel almost overwhelming.
Does this mean that whenever you see your investments gain, you should withdraw your gains to “protect” them? The answer is a clear NO.
So when should you withdraw your money?
1. If you need the money in an emergency
If you really need money for something unexpected like a health emergency, you shouldn’t really care about anything else and withdraw what you need if your financial investments are worth the amount.
Keeping adequate amounts in your emergency fund can help you in such a situation. Learn how to create one here.
2. If you need the money for a planned expense for which you were saving
If you were saving for a holiday or buying a car, take out the money as and when you reach the savings goal and are ready to spend the money. Even in this, don’t take it out and keep it in your bank. As everyone knows, these things can get delayed by months and your money is better staying invested.
3. If your long term goals are approaching and you want to change the category of funds you are invested in.
You were saving for your child’s education for the last 15 years and she will go to college in the next 5. This means shifting your money from long-term category (equity funds) to short term (Debt funds).
Except for emergencies, all planned withdrawals should consider the effect of exit load and income tax.
You invested in equity mutual funds just a couple of months back. Your gains, if you withdraw them, will be much less than you think. Withdrawing your equity investments before them completing a year would typically mean paying
- exit load of 1%
- short term capital gains tax @ 15%.
As for “protecting” your capital and returns, over the long-term equity tends to average to a return level of 14%-16%. Your attempts to “protect” are in effect attempts to time the market. And that, we well know, isn’t a good strategy.