Your portfolio may be full of ‘zombie stocks’: How to identify and exit them

Investors often review their mutual funds, stocks and overall asset allocation, but one part of the portfolio can easily be overlooked: old, forgotten stocks sitting in demat accounts. These legacy holdings may include illiquid shares, companies that have stopped trading or stocks that have long ceased to fit an investor’s financial strategy.

Devina Mehra, founder, chairperson and managing director at First Global, has highlighted the problem of investors continuing to hold such stocks, comparing the emotional attachment to old investments with the difficulty of letting go of past relationships.

In her column, Mehra pointed out that nearly three-quarters of all stocks that have ever been listed on Indian stock exchanges do not trade anymore. She noted that while around 4,500 stocks currently trade actively in the Indian market, the total number of stocks ever listed is several times higher.

This makes reviewing an old demat portfolio particularly important. An investor may have accumulated shares over several decades through purchases, corporate actions, inheritance or investments made by parents. Some of these companies may have subsequently become illiquid, delisted or effectively disappeared from active market trading.

Why forgotten stocks can become a problem

According to Mehra, investors can end up holding stocks that have remained in their portfolios for years simply because they have stopped paying attention to them. Such holdings can clutter a portfolio and, more importantly, represent capital that could potentially be deployed elsewhere.

The problem is often behavioural rather than technical. Investors can become attached to a stock because they bought it at a particular price or because they once believed strongly in the company's prospects.

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Mehra argues that investors should instead ask a simple question: If I had cash today, would I buy this stock at today's price?

The purchase price, she points out, should not determine whether an investor continues to hold a security. Waiting for a stock to return to its original purchase price can result in capital remaining locked in an investment that no longer meets the investor's expectations.

How to identify ‘zombie stocks’

Investors can begin by downloading their complete demat or DP statement and reviewing every security—not just their actively tracked holdings.

Stocks that warrant closer scrutiny include companies that no longer trade regularly, have been delisted, have negligible liquidity, or whose business fundamentals have changed substantially since the original investment.

Investors should also check whether the original investment thesis still holds, whether the company continues to have reasonable growth prospects and whether the capital could earn better risk-adjusted returns elsewhere.

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Mehra's broader message is that investors should be willing to acknowledge mistakes rather than allow them to remain indefinitely in their portfolios. A stock does not become a good investment merely because an investor has held it for many years.

A periodic portfolio clean-up, therefore, is not simply about removing unwanted securities. It is about ensuring that every rupee invested continues to have a reason for being there.