Is it time to book profits from mutual funds?

Published: December 5, 2020 at 12:05 pm

Last Updated on February 12, 2022

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.

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

    🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

    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

    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. 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.
    2. If you need the money within the next five years, then 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 close to 70%. Then redeem about 10% of your equity investments and shift it to debt.  
    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 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).
    5. 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

    1. 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.
    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

    Do share this article with your friends using the buttons below.

    🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
    Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!
    New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
    • Follow us on Google News.
    • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
    • Join our YouTube Community and explore more than 1000 videos!
    • Have a question? Subscribe to our newsletter with this form.
    • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

    Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

      Explore the site! Search among our 2000+ articles for information and insight!

      About The Author

      Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
      Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
      Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
      Our new book for kids: “Chinchu gets a superpower!” is now available!
      Both boy and girl version covers of Chinchu gets a superpower
      Both boy and girl version covers of Chinchu gets a superpower.
      Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
      Feedback from a young reader after reading Chinchu gets a Superpower (small version)
      Feedback from a young reader after reading Chinchu gets a Superpower!
      Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
      Buy the book: Chinchu gets a superpower for your child!
      How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
      Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
      We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
      About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
      Connect with us on social media
      Our publications

      You Can Be Rich Too with Goal-Based Investing

      You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
      Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

      Your Ultimate Guide to Travel

      Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)