The Hindu Business Line : How often should I book profits?

In a recent TV programme, an expert was asked whether it is worthwhile for a retail investor in equity funds to book profits now, in view of the record high levels of Sensex and other indices.

He was categorical that this should not be done, as this is the job of the fund manager. Besides, no one can time the market. Hence, a long-term investor should continue to remain invested in a fund unless he is in need of money or if he feels that a particular fund is not managed properly.

The above is somewhat contradictory to the tenets of stock market investing, where everybody advocates booking profits at periodic intervals. One cannot wait for as long as 25 years for the investment value to recoup. What is your opinion? -- A. M. Joshi, New Delhi

The expert is right; but his advice may not apply equally to all investors. Completely exiting all your equity fund holdings because the Sensex is at a record high does not make sense.

A new record can always be breached, as it has consistently been over the past few months.

Instead, you can book profits on part of your holdings, so that your equity exposures remain at a comfortable level.

If you are a conservative investor, equity investments should probably make up no more than 15-20 per cent of your total portfolio.

Another yardstick that you can use to book profits is to pull out any money that you may require within the next 3-5 years, from equity investments. This would prevent you from exposing these savings to a possible reversal in NAV.

Do take note of the following when you rejig your portfolio:

Liquidate sector, theme and mid-cap funds ahead of diversified funds which can invest anywhere in the investment universe, when you redeem equity fund holdings.

Retain equity funds with a good five-year track record of beating the markets and their peers.

Invest in the dividend options of equity funds so that periodic dividends allow you to lock into periods of high returns.

As to your query about timing, it would be ideal if you could book profits on your equity fund just before the market is set to decline and re-enter it, just when it is about to resume an upward move.

But the problem is that nobody, not even an expert stock trader, knows which way the stock market is likely to head in the near term and the extent of correction.

Over the past year and a half, ever since it breached the 6000-point level, the Sensex has consistently breached new records. But if you booked profits at the 6100-mark because it was a record high, you would have missed out on the substantial gains on your equity fund from that level.

Timing may not work well even over a longer time frame. Investors who booked profits on their equity funds at the Sensex peak in March 2000 would have been quite happy for a while, as the markets then plunged to 2700 levels in 2001.

But few investors would have thought to enter the markets in 2001, and stayed on to reap the benefits of the recent bull market. In contrast, an investor who simply held on to his equity fund from March 2000 until now would have made an annual return of between 18-20 per cent on his investment, from the peak.

This is why experts suggest that you should remain invested in equity funds at all times, instead of trying to time your entry and exit to market movements.

(Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859-860, Anna Salai, Chennai 600002.)

Aarati Krishnan

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