Is profit booking advisable for MF investments?

May 27, 2019

Markets are up again after BJP's victory in the Lok Sabha elections. My mutual fund investments are up about 30% in the last 1 year. Should I book profit now and re-invest later and reinvest once the market comes down?

2 Answers
Jun 8, 2019

Yes, However from Financial Planning point of view re-balancing is a right word for it. A proper balance in the allocation of your Investments to Equity and Debt (Fixed Income Instruments) is very important for achieving your financial goals.

Rebalancing the allocation helps you to safeguard your gains and reduce your Risk due to volatility, Rebalancing should ideally be done annually once, if the allocation increases or decreases by 10 % it can be done in between too.

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Jun 10, 2019

The simple, philosophical answer is NO. The term 'profit booking' is more appropriately used with direct equity. You can evaluate the implicit value of a stock to be Rs 100, and may buy it at that, a lower, price. If the stock then appreciates to Rs 130, and the 'implicit value' has not changed much, it would be useful to 'book profits' in the stock. You can choose to exit from that stock altogether and invest in another stock that is at a reasonable discount to its implicit value.

This approach is quite unsuitable for mutual funds. Since you refer to the recent rally, I presume that you are referring to equity mutual funds. In an equity mutual fund, you are actually paying the AMC and fund manager to make 'profit booking' and other decisions.

Does it mean that you should not 'time' redemption of equity mutual funds? A simplistic answer is No. You can, and should, perform tactical asset allocation and rebalancing. This is a lengthy topic and I find the series of articles on very appropriate. Here is a summary of those articles. I have either quoted the conclusion directly, or have paraphrased it.

  1. Do we need to time the market?
    • "You can time the market if you wanted to, but there is no need. All you need to so is simple Goal Based Risk Managment to get you home."
  2. Is it possible to time the market?
    • "There is no statistically rigorous evidence that market timing will work. If you wish to enter and exit following the PE or moving averages, ... (or similar approaches), you can do so. However do this to reduce risk in your portfolio, and not to get 'higher returns'."
  3. How to reduce risk in an investment portfolio?
    • "Even if the market gives negative returns in the early years, the combination of annual rebalancing and decreasing equity exposure works to achieve the required corpus."
    • "Tactical asset allocation (TAA) refers to changing equity and debt allocations based on certain factors or indicators."
  4. Is tactical asset allocation necessary, and is it possible?
    • "Yes, and Yes. A variety of methods can be used to guide tactical asset allocation. Almost all of them help to reduce the risk in the portfolio."
    • In the specific article, TAA using MOVI has been found useful

To come back to the original question, you can definitely consider redeeming some of your equity mutual funds. However, please approach it from the point of Tactical Asset Allocation rather than timing the market. Have a clear idea of the balance between equity and debt in your portfolio. When the equity markets run up, your would have more equity than desired. So, rebalance from equity to debt and return to the chosen portfolio ratio. And more importantly, do the reverse when the equity markets decline

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