Critics might argue that the rally still has steam left and booking profits at this stage would imply missing out on a golden opportunity. Let's see if our argument for booking profits holds good.
Firstly even the most optimistic investors will agree that they have been lucky to participate in a bull run of such magnitudes. Booking a part of your profits would imply that you have something to show for, if the tide turns. Conversely, if the rally continues, you are still invested in the markets albeit the amount invested is lower. It's like a win-win situation for the investor.
Secondly, most investors always make investments with specific objectives in mind, say planning for retirement, buy a car, save for children's education etc. There is a fair chance that your objectives have been met or are nearing achievement. Another good incentive for booking profits!
Thirdly, the rising markets would have drastically modified your asset allocation. Say exactly a year ago you invested Rs. 10,000 in mutual fund schemes, maintaining a 50-50 break up in favour of diversified equity schemes and income schemes respectively. While equity markets have risen sharply, the same is not true in case of debt markets. Hence your equity and debt components would have risen disproportionately.
Leading Diversified Equity Schemes
|
Leading Income Schemes
|
Assuming that you were invested in any of the abovementioned top performing equity funds, you should comfortably have an average growth of 140 per cent i.e. the equity component would have grown to Rs 7,000. On the other hand your income funds portfolio should have appreciated by approximately 8 per cent to Rs 5,400.
Effectively your portfolio would now be worth Rs 12,400, with over 56 per cent in equity. Markets rallying need not imply that your risk profile is any different now. Booking profits gives you the opportunity to realign your portfolio in tune with your risk appetite. Another issue to be addressed is the amount of profits to be booked. As a thumb rule if you have age on your side with a high appetite for risk, you could book a smaller portion of your profits.
At this stage we also need to discuss, why investors choose not to book profits when the opportunity arises. The temptation to stay invested and rake in even higher returns is simply too strong to resist. Booking profits, on the other hand demands that investors should be strong willed and astute. It takes a spirited investor to exit markets when markets are peaking and a large section of investors actually believes that it's the right time to enter markets.
However,investors who book profits regularly have gains to show for, from every rally they participate in!
