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Only Disciplined Investing can Help

I have invested in a few equity funds with the target of earning atleast 15 per cent returns. My question is should I redeem when my target is achieved? Or if I feel that there is still potential for gains should I stay invested.

I have invested in the equity schemes of mutual funds after that I read an article titled Art of Cricket in Equity Investment. I have set a returns target of at least 15 per cent for my equity portfolio, which consists of Franklin India Bluechip, Reliance Vision and Zurich India Equity. My question is should I redeem all my money when I will get 15 per cent returns or should I carry on and play a long innings like Dravid? Or should I redeem only the profit and remain invested for the long-term? What course of action would you recommend?
Manish Patel, via e-mail

You would have heard that fear, greed and hope are the main forces that drive stock markets. But this is difficult to appreciate unless you go through the actual experience of investing. In your case this seems to be happening. Even though you have not come close to your target, you are already worrying about the course of action to take. By asking if you should hold on even after your target has been reached seems to indicate that you desire even higher returns.

In this case, and in fact, in all other situations there are three possibilities. Either the markets will move higher and you will get even better returns, or they will decline and your profits will diminish. The third option is that they may be range-bound.

Knowing with certainty which option will take place is not possible. No one has been able to consistently and accurately predict the direction of the market over a period of time. Just like Heisenberg's Uncertainty Principle where the position and momentum of a sub-atomic particle cannot be predicted with certainty, similarly in the market, the time and value of the index both cannot be determined simultaneously, and accurately over time. What we can say about the market is that it is attractively valued. We can also say that given these low valuations it should appreciate over time. But giving a time and value for the market simultaneously is only guesswork. Till now, no method or technique has been developed that can successfully and repeatedly predict the trend of the market.

In this environment of uncertainty, the only thing, which can help is certainty on your part. You can decide a target and stick to it. When Dravid goes out to bat, he will bat differently if it is a test match or a one-day game. Similarly, you have to decide whether you are investing for quick profits or long-term returns. Do you want an absolute profit of 15 per cent or do you want to achieve a compounded return of 15 per cent over the long-term, say 10 years. It also helps if you have a clear understanding of what you want to do with your returns.

If you have a plan in place, such as going on a vacation, with your profits, it will help you stay disciplined in booking profits. The more important thing than getting returns or higher returns is meeting your life goals. If these are achieved then the purpose of investing is met. Always remember that in the midst of all the uncertainty, volatility and unpredictability, in the markets, discipline is the most important virtue, which makes you a better investor—an investor who is able to meet his investment and life goals.

After saying so much you may feel that we have not recommended a course of action for you. And that is correct, for we can show you the different roads and where they may lead, but the ultimate decision on which one to take is yours.

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