Exit Strategy In Investments
Exit strategy is a plan which is predetermined and executed to liquidate or redeem any financial asset when the goal has been met or exceeded.
While investors often seem to search for ‘best investments before starting investments, they hardly think about the time to exit or valid reasons to redeem from investments. It simply means that they ignore to make an exit strategy.
Not having an exit strategy can make decision of selling more challenging and sometimes without such strategy they may sell investments at loss.
Let’s understand reasons to have an exit strategy:
Reason 1- You know the time to exit
While making an investment, one makes a proper plan after doing a proper research… correct? then why not plan in advance for exiting from investments? Making an exit strategy with investment planning is important. It helps to get a clear view about time period to hold and when to redeem it.
Reason 2- Makes it easy while liquidating
With investing one should also consider and understand the process of redeeming/withdrawal. Many a time, investors feel stuck in an investment because they often miss to understand the process of withdrawing. For example, ELSS (Equity Linked Saving Scheme) scheme of mutual funds have lock-in period of 3 years to get benefit of tax u/s 80 C. But when one opts for SIP i.e. Systematic Investment Plan mode, this lock-in period works differently. In SIP each installment gets locked for 3 years as each installment is counted as fresh investment.
Therefore, it’s important to plan about exit strategy in advance to avoid any problems while redemption.
Reason 3- Helps to avoid losses
Having a clear exit strategy can help you to reduce the losses. Like when an investor put a sell order for a stock at a particular target price but when it reaches to that target price, investor sometime decides to wait in view to earn more profit. However, this greed can turn the profit into loss. Having an exit plan can help investors to control his/her emotions while investing.
Reason 4- Helps to determine Tax liability
If you know how long you are going to invest and when to exit, it helps in determining the tax implication. By planning for exit strategy, you can also determine the capital gain tax liability towards capital gains/losses. You can even reduce tax liability in case of capital loss by offsetting it against capital gains.
Reason 5- Helps in risk reduction
Exit strategy is technique to reduce the risk as it helps to keep the emotions away while investing. Having a defined exit strategy can help to reduce risk and protecting invested money.
