If you've redeemed investments to take care of a upcoming payments, you might have asked yourself the question, "Which investment do I redeem from?"

The answer is, redeem from your least profitable investments. Sounds logical, doesn't it? Well,... you could debate and say "I'll redeem from my most profitable investments, because that investment will recover the loss quickly". Why debate when we have data. Let's discover the answer with an example.

Assume you need 5K. You have two funds, Fund A (which gives you a return of 20% per year) and Fund B (which gives you a return of 30% per year) - (I know the returns are outlandish. Bear with me for the sake of easy calculation).

You had invested 10K in both funds a year back. Fund A has got you 2K more and fund B has got you 3K more. Let us take three cases to understand from where you need to pull out the 5K you need for the upcoming payment.

Look at the table below to understand how the example plays out. In case 1, we use a common principle of profit booking, we pull out the profit from last year. So we redeem 2K from Fund A and 3K from Fund B. After redemption, we have 10K left in Fund A and 10K left in Fund B - our original investment made one year ago.

One year from now, assuming that the returns remain the same, Fund A has made 2K and Fund B has made 3K. So in case 1, our total profit in one year from now is 5K.


In case 2, we pull out the entire 5K from Fund A. One year from now, we earn 5.3K.

Finally, in case 3, we pull out the entire 5K from Fund B. One year from now, we earn 4.8K.

Ah huh! Case 2 is the best option! So if we redeem the 5K from A, which is the least profitable investment, we get better returns one year from now... Hence proved.

Footnote: Disciples of operations management and constraint theories will claim that this is a sub-optimal solution. There could be a point in between, where you redeem a particular proportion of A and B and you will get the best results, better than 5.3K. Well, you should be right. My point is, normal people, in normal circumstances find calculating this proportion rather... er... problematic. The solution above is a thumb rule. Works ok most of the time.