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Should I be booking profits?

Posted By: Admin

After reaching a peak of 62,156.48 Pts on Sensex ( Nifty value: 18418.75) on 19/10/2021 market has been  facing a continuous draw down for the past few weeks there might be lots of reason behind the drop like Fed rate hike, global inflation and increase in commodity price. Might even be due to the war which is going on in Russia and Ukraine. 

It is not easy to predict the market. In history no one has developed any strategy or model to predict the market. In hindsight,  people would have thought that booking profit and re-entering the market at a lower level would have been a better strategy. It's human nature to protect your investments from losses or to move the investments into safer investments like debt funds. Mutual funds have market risk hence one should know when to book profit in one’s mutual fund portfolio. 

It is empirically proven that the biggest wealth creation happens only when you participate in the market. It is therefore essential to hold good funds for a longer period and to create significant wealth. Investors should follow the strategy of BUY & HOLD to have a good return in the longer run. In booking profits you would be reducing the amount of equity participating in the equity market, thereby reducing your ability to generate alpha to that effect. 

So Should profits be booked  in equities or not?

Yes, it can be done. But it would be good in certain scenarios.. as elucidated below. 

  1. Achievement of Financial Goal:

For those investors whose financial goals are only  one or two years away and their portfolios esp equity ones have generated stupendous returns, then they must plan to  gradually move their holdings from equity to debt funds, therefore book profits;

  1. Rebalancing the portfolio:

As an investor, if one has an asset allocation in place, over the years the equity portion will increase faster than debt investments. In this scenario investors can sell equity and reinvest in debt and rebalance the portfolio. This is a necessary step to keep the investments in the desired Asset Allocation. 

  1. At the time of Emergency:

When you feel this is the last option, in case of emergency,  mutual funds will provide fastest liquidity compared to any other asset classes. 

Conclusion: 

The mutual funds are managed by fund managers and they are in the better position to take a call on profit booking based on their experience and view. The reason to sell equity investments is either to realise a financial goal or to rebalance portfolios. Any other reason apart from these two will possibly cause more harm than good to your long-term investments returns.

“Little disciplines compounded over time make a huge difference.”

By Bhuvaneswari, Sherpani

 

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