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To book profits or not to book?

Should the market approaching a peak have a bearing on your equity holding? Whether you are a regular SIP investor or using lump sums as a way to wealth creation via equity mutual funds, you are likely to be tempted to take away some of that profit in fear that the rally could end soon.

The benchmark BSE Sensex is at an all time high, and undoubtedly noise around an imminent correction has started to build up. It always does around market peaks.

Should the market approaching a peak have a bearing on your equity holding? Whether you are a regular SIP investor or using lump sums as a way to create wealth via equity mutual funds, you are likely to be tempted to take away some of that profit in fear that the rally could end soon. Even if the rally doesn’t end, you may feel better off protecting your profits from a downturn in the market. Here are two things you should consider before you make your decision.

1. Predicting a correction or a down turn is practically impossible.

For all you know the market may continue moving upwards setting new highs all through the year. The reverse could happen as well and the equity market may correct 10% before resuming an uptrend. In a worst case scenario, we don’t see any positive returns from equity markets in this calendar year. Any of these outcomes is possible, perhaps in varying degrees of probability, but nevertheless, its all possible. Unfortunately, no one knows which one, when and, to what extent. Thus, its better not to alter long term investments based on short term market expectations.

2. Always keep your strategic asset allocation in mind.

Asset allocation is the break up of your investments in different assets like equity, debt, real estate and so on. Financial assets usually get bucketed into equity or debt. Now let’s say you have a 60-40 equity debt asset allocation. Given that market values change, this allocation is also likely to evolve.

If in your periodic portfolio review, you find that the allocation to say, equity has shot up significantly more than what was required, then that would be an appropriate time to book profits or rather bring your allocation back to the planned one. Say, during review you find that equity debt is now 70-30, you may want to think about booking profits and bringing down the equity exposure closer to the strategic level of 60-40 in order to maintain the risk return balance of your portfolio.

Profit booking for long term portfolios needs to be a function of your goals and the ensuing asset allocation, rather than the market level at any point in time.

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