The Nifty Total Returns Index generated about 20 per cent return since January this year. How much did your portfolio generate during this period? Whatever your actual returns, two questions are pertinent.

Are you carrying large unrealised gains in your portfolio? And if you have taken profits, do you have a plan to manage these gains?

You should have a pre-determined plan to manage your realised gains. Here’s how to go about it.

Managing profits You may be taking profits on your portfolio for various reasons. But for the purpose of this article, we will consider only one — you are selling your investments because you are anxious to capture gains on your portfolio.

We address this issue for a specific reason. If you are selling your investments to meet a liability, such as making down-payment for a house, we know you are using your sale proceeds for the intended purpose.

But when you sell to capture unrealised gains, you may be tempted to use the sale proceeds for purposes other than to meet life goals.

For one, you may want to reinvest the proceeds back in the stock market.

If the market is climbing, your willingness to take risk will be high.

And, two, you may be tempted to spend on discretionary expenses, such as an exotic vacation or luxury goods.

That could hurt your ability to achieve a life goal, especially if the investment was initially meant to meet future liability, such as your post-retirement living.

A pre-determined plan to reinvest realised gains will help you control your emotions and facilitate your progress in achieving your life goals.

Here are some ways you can manage your gains within a core-satellite framework.

How to manage gains That is, the core portfolio is invested to meet your life goals and the satellite portfolio is created to generate short-term gains from the market. One, have you sold investments from your core portfolio earmarked to achieve a goal within the next five years?

If yes, do not re-enter the market; you may not have time to recover investment losses. Instead, invest the sale proceeds in bank deposits with maturity matching your residual investment horizon.

Two, have you sold investments from your core portfolio meant to achieve a life goal with an investment horizon over five years? If yes, re-enter the stock market through a systematic investment plan (SIP) spread over 8-10 months. During this period, you can keep your sale proceeds in a savings account.

Or you can create laddered deposits; invest the first month SIP in a one-month deposit, the second month SIP in a two-month deposit and so on. Three, are the assets you sold part of the satellite portfolio? If yes, reinvest the proceeds into the stock market based on a pre-determined rule.

For instance, you can take profits if the unrealised gains are 10 per cent or more and re-enter when the market declines by 15 per cent or more. Till you re-enter, invest the sum in bank fixed deposits.

Which deposit? When you park your sale proceeds in fixed deposits with a view to reinvesting in the stock market, you do not have to choose short-term maturities.

You can, instead, invest in maturities that offer attractive interest rates.

If you find an opportunity to re-enter the stock market, you can always withdraw your deposit. Do remember to check with your bank for penalty on premature withdrawals.

The author is the founder of Navera Consulting. Feedback may be sent to > portfolioideas@thehindu.co.in

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