Market return data, however, indicate that this has not been the case. It has at least not been the case in the past seven years in the case of BSE-200. Monthly return data in the BSE-200 indicate that there were large gains interspersed with large losses.

In addition, large losses outweighed the large gains. It is thus clear that profit-booking is just as important as staying invested through market downturns.

Since equity funds track BSE-200 closely, profit-booking is important for your mutual fund portfolio too.

To elaborate, since 2000, every year has had at least one month in which stock prices fell 5 per cent or more. In 2001, we had two months in which stock prices fell more than 10 per cent. Even since 2003, when stock prices rose sharply, there was an 18 per cent fall in stock prices in May 2004.

Easier said: If monthly returns follow the same pattern then there may be no option but to book profits. Booking profits is, however, is easier said than done.

Simple rules of thumb may clearly be ineffective. Investors will need to take help from technical analysis to time their entry and exit.

In addition, if the market has entered a bullish phase you may need to hold on longer before booking profits. In contrast, if the trend is bearish, you may need to book profits much earlier.

Hedging events is also necessary. For instance, the general election in May was an event that needed hedging.

If you had hedged your positions, you may have gotten off quite lightly. In banking sector stocks, the forthcoming Credit Policy is an event to be hedged.

So is the Budget next year. At the same time, you need to be cautious about the number of events you want to hedge. If you hedge frequently, the cost of hedging will pull down returns.

The right portfolio: It is also important to create the right kind of portfolio.

Two schemes that appeal in this context are Templeton India Growth and HDFC Top 200. They now sport good performance records over many years. They outperform the market in most months.

When they under-perform they do not under-perform by much, and these are usually when the market rises sharply. They also outperform the market when stock prices fall.

Investors may also need to keep an eye on schemes such as UTI Grandmaster, SBI Magnum Contra and Reliance Growth.

The performance record of these schemes in recent years has been exceptional. You can consider accumulating exposures in these schemes after scrutinising their performance over the next few years.

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