After three years of SIP investment can I book partial profits now?

Published: September 5, 2021 at 8:33 am

A viewer on our Youtube Channel asks, ” I have been investing in index funds for the last 3 years in sip mode. Can I book partial profits now?” The answer to this question does not depend on whether you invested in index funds, active funds, or direct equity. It depends on your asset allocation and investment strategy.

The stock market is a place where someone feels uncomfortable no matter what the market trend. If there is a bull run, some investors want to exit in fear. If there is a crash, some investors want to stay away. If there is a bull run or an all-time high, people fear an impending crash.

This fear and uncertainty come from the lack of a proper investment plan. Couple this with following random experts on social media who predict crashes each week, it is a one-way ticket to financial catastrophe.

A reader just sent the link of a tweet that predicts a bear run starting next month and lasting for a year! What worries me more are the comments: many actually believe we can predict when bull or bear runs will start and how long they would last. It should be no surprise.

I would suggest the viewer who asked this question and anyone else who feels the same way try this activity. Take a notebook and answer the following questions:

  • Why are you investing? Everyone wants wealth, but what will you that wealth for in future?
  • What is the asset configuration of your portfolio today? How much of it is into equity? How much of it is in fixed income?
    • Is this asset allocation for your future need?
  • What kind of investor would you like to be?
    • The guy who keeps looking at market levels and remove money every time there is a little gain. If you want to be this guy, then the rest of the article is not for you.
    • Or would you like to invest in auto-pilot mode so that you have more time on your hands for personal development? You need to spend 30 mins a year reviewing the portfolio and adjusting the asset allocation. Read on if you like to develop a system in which you don’t need to know or worry about market levels.

Investors who should book profits now

  1. If you have invested 100% equity, this is a good time to plan for your goals systematically, draw up an asset allocation plan and shift some money from equity to debt. You decide what percentage of your investments would be in equity and what percentage in fixed income for your goal, and how you would change them in the future.
  2. If you need the money within the next five years, thank your lucky stars and exit completely to the safety of fixed income.
  3. If your equity exposure is higher than what you planned it to be. For example, you wanted 60% in equity, and you now find that it is now 65% or more. Then redeem the excess from equity and shift it to debt.  I recently did this: I rebalanced my retirement portfolio after 13Y, a crash & recovery! Considering my age and proximity to goals, I might rebalance once more.
  4. If you need money within the next ten years,  this is a good time to reduce your equity exposure. For example, I started investing for my son’s future in Dec 2009, a month before he was born. At that point, I was investing for an 18-year goal. I had maintained an asset allocation of close to 60% equity during the last ten years until April 2021. I saw the equity allocation had shot up to 67%. Considering that the goal deadline – at least the first deadline when he starts UG is only eight years away, I have now removed about 12-13% of equity to fixed income (details in my yearly audit coming up).
  5. If you hold multiple types of mutual funds –  four large caps, give midcaps etc. (thanks to robo MF portals), you can consolidate your portfolio. You can redeem units free from exit load and within the one lakh tax-free LTCG limit and reinvest elsewhere as per an asset allocation.

Investors who should not book profits now

  1. To first answer the question asked above, never use returns as a gauge for removing money. On March 23rd 2020, my retirement portfolio equity MF return was 2.75% at the bottom of the crash. By Sep 2020, the return was 9%, and now it is about 13%. During this time, the equity asset allocation only varied by about 7%  (55% in March, 58% in Sep and now 62%) and over the last year only by 4%. What matters is the amount of money in equity and not by how much it gains. You could have got 25% returns with only 10% equity exposure. In such a case, removing money out of fear makes no sense.
  2. Investors whose equity exposure is less than what it should be. For example, you may have started investing late with 80% debt and 20% equity for a 20-year goal. Your desired equity allocation could be 50-60%, So it makes no sense to book profits now and reduce equity allocation further. Leave it alone and get used to volatility. This is the first time my retirement equity exposure has breached 60% since June 2008! Since my retirement is not planned anytime soon, I am not inclined to remove that extra 2%.

In summary, asset allocation is the key. Every portfolio decision revolves around that. If you would like to start investing in the right way, here is a free seminar to help you get started: Basics of portfolio construction: A guide for beginners

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
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