Are you holding large unrealised gains in your equity portfolio? If yes, you are exposing yourself to the risk of wiping out your gains by not taking profits.

The flipside is, of course, the regret you will suffer when you take profits only to see the stock market move up further from those levels!

But carrying large unrealised gains is risky. Here’s why.

Asymmetric-returns effect Suppose you had invested in a Nifty Index Fund on January 1, 2009. You would have gathered unrealised gain of 108 per cent by November 2010 (gross of fees and not considering tracking error).

But what if you failed to take profits on your portfolio? By December 2011, the market had declined 27 per cent from the November 2010 highs. And what would have happened to your portfolio? The point-to-point return (from January 2009 to December 2011) on your portfolio would have been only 53 per cent.

So just a 27 per cent decline in the market was enough to wipe out half the unrealised gains you accumulated between January 2009 and December 2010.

What does all this mean? It takes a lot of effort to recover capital losses or claw back unrealised gains.

On the other hand, it takes little effort for the market to wipe out unrealised gains in your portfolio.

That is why we want you to manage your profits in your portfolio. For, not booking those profits would eventually lead to a shortfall in your portfolio’s terminal wealth.

This is the wealth accumulated in your portfolio at the end of an investment horizon to meet a particular life goal.

So how should you protect your portfolio from the vagaries of the markets?

Managing asymmetry First, compute the minimum acceptable return or MAR for each life goal. MAR is the return you require on your investment (initial capital and periodic contributions) to build up enough of a corpus to achieve a life goal.

MAR is simply the annualised compounded return over the investment horizon.

Suppose you require a MAR of 10 per cent and your investment horizon is eight years. It means you require 10 per cent compounded annual return over five years.

If your portfolio returns are in excess of MAR in any year, take profits on your investment to the extent of the excess returns. Suppose your ₹1-crore portfolio experiences 12 per cent return against an MAR of 10 per cent, take 2 per cent profits on ₹1 crore.

You have to leave the unrealised gains of 10 per cent inside the portfolio. Your portfolio has to earn 10 per cent every year on the capital plus unrealised gains to achieve your life goal, because MAR is the compounded annual growth rate.

Take the excess profits and invest it in a bank fixed deposit of any maturity that offers attractive interest rate. But check if the bank charges penalty for premature withdrawal.

You may need to use this fixed deposit to reinvest in equity during years when the actual return is less than MAR.

Manual managing You have to manually manage the profit realisation strategy. You can do this by reviewing your equity portfolio annually in a “normal” market.

But in an uptrending market, you should review your portfolio more often — at least once a quarter.

Indeed, this is a small price to pay in order to keep you safe from the vagaries of the market!

The writer is the founder of Navera Consulting. Send your queries to >