When to Book Profits in an All-Time High Equity Market: Expert Tips

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In the past few days, the Sensex has hit 78,000 points and the Nifty has gone beyond 23,700 points. People are thrilled but also feel unsure. Should I cash in now?  Is it a good idea to cash out some profits? Will the market plummet? When to book profits in an all-time high equity market? These are the thoughts on everyone's mind. If you're feeling the same, then this video is for you.

In this article, we will explore the key factors and expert tips to consider when deciding whether to book profits or stay invested in the current market scenario.

Do’s and Don’ts of Profit Booking

So, what are the dos and don’ts of profit booking? When it comes to investing in stocks and mutual funds, remember that knowing when to exit is just as crucial as knowing when to enter. We can't all be like Abhimanyu from the Mahabharata, who could enter the Chakravyuha but couldn't find his way out and met a tragic end.

It's crucial to have a clear exit strategy in mind when starting an investment plan. What are we aiming for with our investments? What is the final target we are aiming for? Before diving into that, let's discuss a key aspect of investing - should we be booking profits at all? And if so when is the ideal time to book profits in the current market?

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When to Book Profits in the Current All-Time High Market?

Let's take a closer look at the examples below to know the different scenarios in which one can consider booking profits.

• If you have a long-term horizon, such as five, seven, or even ten years, it's completely fine to stay invested in the markets. Sure, there might be some ups and downs along the way, but that shouldn't deter you. Stay patient and stick with well-diversified equity mutual fund portfolios, and I'm confident the market will recover and provide you with returns beyond your expectations. For long-term investors, the best course of action is often no action at all.
• If you have upcoming cash flow needs in the next year or so, now could be the right time to transfer that money from your equity portfolio to a more secure location to ensure you have it readily available when needed.
• If the fear of your portfolio crashing keeps you up at night,  it could be wise to withdraw a significant portion of your profits from the market. It's essential to analyze which scenario suits you best and make a decision accordingly. Now let's discuss profit booking, specifically within the mutual fund industry.

What is Profit Booking in Mutual Funds?

Let's take a closer look at profit booking using a live case study. Consider this scenario with Mr. Vignesh's financial statement - he invested ₹1,00,000 on January 1, 2020, and received 10,000 units at a NAV of ₹10. Now, three years later on December 31, the NAV has surged to 22, showing remarkable growth in his portfolio value.

The 10,000 units are currently worth 2,20,000, resulting in a profit of 1,20,000 for Mr. Vignesh. He then decides to withdraw the 1,20,000 profit by redeeming 5455 units at an NAV of 22, leaving him with a certain number of mutual funds continuing to invest in that scheme.

It's crucial to grasp the significance of this because no matter how much profit you withdraw from the mutual fund, the statement will always reflect the remaining investment and profits. For instance, even after withdrawing 1,20,000 in profit, the statement on January 1st will still show a portfolio value of one lakh with a profit of 54,000.

When you take out money from a mutual fund, there's a part of your initial investment and a part of the earnings included in each unit you withdraw. This means that only a portion of the money you receive is considered capital gains. Understanding this concept is important, especially when it comes to profit booking in mutual funds.

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Steps to Take for Profit Booking

1. Asset Rebalancing

There are multiple ways to accomplish this, one being through an asset rebalancing model, which is widely regarded as the most systematic approach. For instance, if your investment portfolio was originally divided equally between equity and debt funds, recent market performance may have skewed the balance to 70% equity and 30% debt.

The equity investment has shifted from 50% to 70%, so now you need to rebalance by moving ₹20 from equity mutual funds to debt. This strategic move is known as tactical asset allocation, where you adjust your portfolio accordingly to maintain a 50-50 balance between equity and debt. By doing this, you are securing profits from equity and transferring them to debt. Not everyone has their asset allocations sorted out, so if you're in that boat, you'll have to take a different path.

2. Redeeming Some Amount Of The Investment

You can take the next step by withdrawing exactly 1,20,000, which is the total profit from the system. The advantage here is that you're not taking out all the money from equity. This means that if the bull market continues, you still have funds working for you in the equity market. At the same time, you've secured a certain amount of the gains by withdrawing it from equity. This is the second method.

3. Exit the Entire Equity Investment

If you're constantly afraid of market crashes, you'll likely have trouble sleeping. The fear of losing your portfolio and profits can be overwhelming. In this case, it might be best to consider exiting your entire portfolio. While it's not my top recommendation, one option to consider is pulling all your investments from the equity market. By transferring your funds into debt or cash, you can safeguard your money and profits. Just be aware that there may be a substantial capital gain involved.

As we recall, if you're concerned about the state of the markets, there are a few paths you can take. I prefer the asset rebalancing model. Another option is to take profits if rebalancing isn't possible. And as a final resort, you could choose to exit the equity market.

If you decide to exit the market now and the bull market continues for another six months, a year, or two years, re-entering will be extremely challenging. This is why we advise our clients against completely exiting the Equity markets. It's better to take some profits from your portfolio instead. That's the most favorable option.

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Points To Be Remembered

1. Make Sure You Have Invested In At Least A Year

Making a profit from your investments means you'll have to pay capital gains tax. To keep that tax rate low, make sure you've held onto your investment for at least 365 days. If not, you'll be hit with a higher 15% tax rate. It's best to only cash out profits from investments that have been held for a year or more to keep your taxes in check.

2. Do Not Reinvest In A New Equity Fund

Also, avoid using the profits from your book to invest in a new equity fund. We think it's best to take out the profits because we trust that the equity market has already provided a specific return. It wouldn't be wise to quickly put this money into another mutual fund scheme.

It's up to you to determine if the other scheme is significantly undervalued and act accordingly. However, we recommend keeping it in a secure place, at least temporarily. Consider re-entering the market gradually instead of all at once. These are factors to think about and implement as you see fit.

In summary, profit booking is a highly customized and individual-specific activity. While it's very challenging to establish a broad framework, it's important to carefully consider each person's temperament, financial needs, and other relevant factors before selecting the best option.

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