Last Updated on February 12, 2022 at 6:15 pm
With the Nifty/Sensex zooming to all-time highs within months of the biggest intraday fall when 10-year Nifty SIP Return fell to 2.3%, and 14-year SIP Return to 5%, investors are not happy to see healthy gains and double-digit mutual fund returns. With the natural nervousness associated with a market up move, investors would like to know if it is the right time to book some profits from mutual funds. We discuss, who should and who should not.
Here is one such question received on YouTube: Hello Sir, what percentage of appreciation will you classify as stellar returns? one of my large cap funds is at 11% appreciation on an investment of 1 lac. Do you think this a good time to rebalance? Thank you!
Those interested in profit booking each time the market hits an all-time high can consult our previous study on market timing strategies based on market all-time highs.
Some basics: It is not possible to book profits from the stock market or from mutual fund. When you redeem, some portion would be gains and some portion would the principal. You cannot remove only the gains. Profit booking is mere mental accounting.
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Investors who understand the basics of portfolio management should cringe at this term, but it has got stuck among the investor community and we use it to get their attention.
Investors who should book profits now
- 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. That is, 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 future.
- If you need the money within the next five years, then thank your lucky stars and exit completely to the safety of fixed income.
- 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 close to 70%. Then redeem about 10% of your equity investments and shift it to debt.
- 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 yesterday. 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).
- If you are holding 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
- To first answer the question asked above, never use returns as a gauge for removing money. On March 23rd 2020 at the bottom of the crash, my retirement portfolio equity MF return was 2.75% 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.
- 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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