The Hindu Business Line : Profit-booking: Evaluate risk appetite

THE tendency to book profits seems to have gained an upper hand with some investors in equity funds, emboldened as they are by a rising market that is again giving them fresh opportunities to move out at higher levels.

The BSE Sensex has again topped the 5,000-mark after having gone down by a critical margin since the last time it did so. Investors who had stayed put would only have to congratulate themselves - NAVs of equity funds are indeed up again.

A section of the market is currently apprehensive about what many think would appear as year-end problems. Institutions would pull out and the overall market would lose its sheen, it is felt. While no one can state for sure what could happen in end-December, equity funds would just have to live with these apprehensions.

Profit-booking is often an extremely difficult - and sometimes emotional - exercise. It is based on the belief that one has gone through enough and has been able to extract maximum value from one's investments. The decision is the investor's own, founded on factors such as expectations, risks and rewards. Any of these factors could change suddenly for the worse and one has to be ready for jolts and jerks. Also, profit-booking may be actually quite necessary when one's risk profile alters substantially.

Diversified equity funds have seen a good run this year and investors who have stayed loyal to them since the early days of the rally have already recorded handsome notional returns. Most of the broadbased equity schemes are now invested to a large extent in sectors such as banking, IT, auto, pharma, chemicals, metals and oil & gas.

Some have followed very aggressive strategies, while others have tried to remain disciplined and steady. Reliance Growth and Franklin India Bluechip could perhaps be the best examples of the two extremes. Whatever the approach, it is for the investor to decide whether he or she should take out profits after entering at a relatively lower level.

Market circles, however, advise investors to fully exercise their judgement before a pull-out decision is implemented. One of the smarter options, it is pointed out, is to take away only the appreciation (that is, whatever has accumulated over and above an original investment) and deploy it in safe areas. In other words, an investor who has seen his allocation of Rs 10 to an equity fund grow into Rs 14 may remove Rs 4 (the appreciation) to, say, a fixed-income security. And this gives the core investment, which remains unchanged, a chance to grow yet again.

It is true that fund houses are trying hard to retain loyal clients with the hope of managing their money for longer periods. Equities are expected to provide superior returns over time, beating other classes of assets, an idea that needs to be driven home every time investors turn fearful.

On another front, investors may take a look at the recent actions taken by SEBI to sustain the cause of mutual funds. The securities watchdog, whose actions form part of what has been called a `strategic action plan' for 2003-04, has issued guidelines for investments in overseas equity markets by MFs. It has also allowed them to launch Fund of Funds.

Further, SEBI has strengthened the disclosure regime for fund houses with a view to ensure that all key disclosures are made to investors in cases of consolidation of schemes.

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