The strong Bull Run in the markets since the last 6 months has ensured good returns to investors. So, obviously, it is tempting for investors to book profit by selling their Equity Funds. Old timers are sceptical of the market's rise and still remember fearfully the drastic fall of 2008 - They believe in "Good times do not last forever".
Questions obviously rises how much is enough, shall I book profit and move to debt, etc. And, while you find dime a dozen articles on "When to buy and Which fund to buy", you rarely find "When to sell and which fund to sell".
When I googled "When to buy a mutual fund" it showed 2,46,00,000 and when I googled "When to book profit in mutual fund" it showed 1,04,00,000. Less than even half!
It is a surprise how people change their investment strategy with the market behaviour. Sure, one should move with the markets but changing your strategy every time with change in market sentiments is a sure shot recipe for disaster. At Market lows, in Dec 2008, investors were afraid of markets and were looking at Debt funds as a diversification tool and now with the slight positive change in Equities, they go and even redeem their Debt funds to invest in Equity.
Stick to Asset Allocation
Sticking to Asset Allocation will automatically ensure profit booking and buying at lower levels. Your Financial Advisor should be able to guide on this.
Booking profit should be more a part of Portfolio Balancing to stick to your Asset Allocation rather than timing the market.
Moving to other Funds
The grass is always greener on the other side. You may feel tempted to move your Mid Cap fund from AMC X to AMC Y. But, before doing so, consider calmly why you are doing so??
- Just because you were tempted by the attractive advertisement that you saw?
- Just because your Mutual Fund distributor says so?
Think again. Switch funds only when the fund is underperforming its peers.
Achieved your target
If the fund has achieved its target which you initially started, (like achieving a specific target amount), then you can redeem that particular fund
Change in mandate of the Fund
A fund changing its mandate from say a Large Cap Fund to Diversified Equity Fund or a Diversified Equity Fund becoming a Sectoral Fund (Example - Chola Freedom Growth Fund - a diversified fund changed its name and mandate to Chola Freedom Technology fund and became a IT focussed fund) definitely needs to looked at seriously as it affects your Portfolio Allocation drastically. Suddenly, the fund may not compliment other funds in your portfolio
Change in Fund house
Even if the fund does not change its style or mandate, a fund being taken over by another AMC ensures a Change in way the fund is managed and definitely the fund could take a deviation from its style (it could become aggressive or ultra defensive). Even its stock weightage could change; even if the style or mandate does not change you should still take a serious look at the fund and can move out.
Example - Daiwa Industry Leaders Fund was a Large Cap fund but when it was taken over by SBI, they changed it to SBI Small & Mid Cap fund which completely disturbs an investor’s portfolio allocation wherein he has to sell the fund to rebalance the portfolio.
Never let sentiments rule your decisions
As long as the going is good, investors do not mind the occasional bout of volatility, but if there is a sustained uptick or downfall, suddenly investors get all kind of thoughts crossing their mind and some in fact, even go as far as exiting from Mutual Funds itself completely.
Do not let Greed or Fear rule you. Do not follow herd mentality. Do not sell in panic nor invest because of some Headline Grabbing news.
"YOU" may be bearish/ bullish, but that does not mean the market too has to feel the same.
Change in Tax status
Yes, if the Tax Policy affects your Fund, then you can consider selling your funds. Suppose, you had invested in Arbitrage Fund with a 1 year horizon and the Government suddenly decides to treat Arbitrage Funds as Debt funds (instead of Equity Funds as it is done now), then you have to move your Funds as required.
As you keep on investing, sometimes Funds tend to overlap in terms of style, mandate and theme etc. This could be due to merger, takeover, change in mandate. This affects your diversification and affects the overall Portfolio Allocation. Then you can go ahead and sell your fund, after taking view of your Financial Advisor.
If there is an emergency and you require money, then of course, you can go ahead and redeem your funds. But, you have to first redeem your debt funds, then your balanced fund and then the Equity funds, only if you still require the money.
A prudent Financial Plan, however, should be such that even an emergency should not affect your Equity Mutual Fund portfolio. We choose a large-cap fund. However, after some time we observe that the fund is taking exposure in mid-cap sector too
Do not time the market
It is of course, tempting to sell when the market has rallied so quickly and gone up so high from lower levels. But, are you sure that the markets are going to tank in near future? Are the valuations are at a peak? However, the caveat is, that by doing so, you are denying your funds to give you good "Compound" returns.
Do the profit booking only if you are a short term investor.
Allow the power of compounding to work
Profit booking is the biggest block for your money to give compounding returns. When you invested in the first place, you invested towards a goal, then why is it that you want to sell now....SIPs should be linked to your goals. Has your investment achieved its goal.....or is it anywhere nearer to its goal???
If your goals are long term, then booking profit now does not make sense.
Your fund could be performing poorly compared to its peers. But, if the performance is poor only in the short term, say 1 or 2 quarters, you can ignore the poor performance and stick with the fund. However, if your fund is performing consistently poor especially compared to its peers then go ahead, sell the existing fund and replace with a better performer.
Nearing your goal
If you have invested for a specific goal and the goal is nearing, then switching to Debt/Arbitrage funds is definitely recommended. But do so gradually rather than at one go.
One way to book profits is going for Dividend option. Fund manager will distribute the profits when the Fund Manager will feel that the markets seem to be overheated. You can then invest this Dividend proceeds into Debt Fund.
But then, when to sell
As said earlier, you should book your profits when your actual return has exceeded the target return or when you need to re-balance your asset allocation.
And yes, when your tea boy starts giving you Stock Advise, you can be sure that the time has come to say “Bye Bye” to stock markets for some time to come.
What should you do now
One suggestion I want to give you at this 'typical' question of yours is to consider the fool proof strategy - invest in a Balanced Fund as these funds automatically book profit when the market goes up and buy stocks when the market goes down.
If you do have to sell the fund, sell underperformers and not winners. Investors tend to have this habit of latching on to losers in the hope of gaining at least cost value, with the result the portfolio will have only duds and underperforms.
That's why it is absolutely essential to take the services of a competent Financial Advisor who can guide you on this.
Finally, dear investors, do Re-balancing and not Profit Booking. Profit Booking is done by traders and Re-balancing is done by Investors.
And it is a fact that Worldwide, Investors make more money than Traders.
It is of course, without any iota of doubt, that your Financial Advisor should take the final call. He will look at all the aspects including your Asset Allocation and then recommend whether you should indeed redeem/sell your Equity Fund. Best of luck!