Behavioural biases that damage your investments!

Adversities can strike anyone without warning, but what is important is how you respond to them. However, when it comes to money difficulties, they are sometimes the result of a lack of proper planning. 

Many investors invest solely to build a corpus for retirement. As a result, retirement savings are often drained during time of emergencies. Numerous expenses should be accounted for but are frequently overlooked.

Salaried individuals frequently withdraw from their employee provident fund (EPF) or public provident fund (PPF). Individuals selling shares and mutual funds frequently redeemed their profitable investments. While there is no damage in dipping into any available resources, a more systematic approach is required.

Create emergencies money

A prudent strategy for emergencies is to utilise contingency reserves. For instance, a retiree may liquidate their equities account first before addressing their debt portfolio. After that, you can analyse your investment portfolio to determine which investments to liquidate. On the other hand, individuals in their middle years may wish to consider redeeming a portion of their debt portfolio since they have a longer time horizon and can always make up for it with surplus cash.

If you have a long-term time horizon, you should let your equity portfolio develop rather than redeeming it for emergency purposes. If circumstances necessitate the withdrawal of cash from your stock portfolio, you should always conduct a review of your equity funds and redeem any that are underperforming. Additionally, taxation and expenses should be considered before liquidating any of your investments.

Consequences of using your money from the retirement fund

Abandoning an equity-oriented mutual fund before the end of the one-year holding period may incur a 1% penalty, referred to as the exit load. Selling shares or stock funds obtained within the last year will result in a short-term capital gain tax, which will reduce the profitability of your assets. 

Similarly, if you redeem fixed deposits with only a few months remaining until maturity, you may have to pay a1% penalty on the interest amount.

Suppose you are not adhering to an asset allocation strategy or any other investing plan. In that case, it may be even more difficult to liquidate investments, as you may be losing sight of them. You will probably wind up selling the bulk of large-cap funds in favour of midcap funds, which may not be beneficial if your risk tolerance is low.

That said, the decision to exit a particular investment is critical and affects the returns earned by your investment portfolio. 

As an investor, you should take a holistic picture of your portfolio rather than relying on convenient sources of funding. Additionally, it would help to explore reinstating investments that you may have liquidated to fund emergency expenses. 

If your portfolio is heavily weighted in equities or real estate, it becomes critical to analyse current market conditions. If your portfolio is heavily weighted toward real estate, you may run into trouble, as liquidation is not an easy operation.

Further, there is no assurance that investors who adhere to a personalised asset allocation strategy would never face financial difficulties. However, it argues that if they comply with an asset allocation strategy created with their objectives in mind, they will be better equipped to deal with financial emergencies than those who do not.