The question about profit booking in mutual funds always crops up when markets are surging. Metrics like 52-week high, all time high, highest percent daily gain in a decade etc become eye-catching and make investors think if markets are overvalued and if the timing is right to exit.
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However, financial experts advice investors to not time the market and stick to asset allocation.
“If a certain investment product including mutual fund allocation has gone high because of market appreciation then it’s better to rebalance and restore the asset allocation. The other reasons that investors may look at exiting some mutual funds is either the need for liquidity or if the product characteristics have changed to warrant a re-evaluation,” said Anup Bansal, Chief Investment Officer at Scripbox while talking exclusively to CNBC-TV18.
In short, Bansal was conveying that the objective should never be profit booking but rather maintaining alignment with goals, risk tolerance and asset allocation.
“When adherence to asset allocation is followed rigorously and judiciously, investors will automatically book some profits for assets and mutual funds that have appreciated significantly and re-invest in other assets and categories. This in the long term will ensure risk management and consistent growth in the portfolio,” Bansal said.
Seconding his views, Gopal Kavalireddi, Head of Research at FYERS said that prudent investors could rebalance their portfolio of stocks, while continuing with their SIPs, to counter the volatile market conditions.
Speaking on the current scenario, he said that mid and small caps out performed large caps for two successive years and expecting a similar performance in the coming year also might not be appropriate.
"With recovery in corporate earnings, milder impact of Omicron on economy, and demand growth remaining strong, investors can expect good earnings growth from most companies, with the expectation that large caps would be leading from the forefront, especially in terms of returns," Kavalireddi said.
According to Abhinav Angirish, Founder at Investonline.in, mutual fund investing is synonymous with goal-based investing and so ideally booking profits depends on how far the goal is.
"If the goal is two years away, investors can consider booking partial or full profits and investing the same amount in short term debt funds or liquid funds. But if the goal is a few years away, investors should not worry about booking profits prematurely. Just like there is no right time to start a SIP, there is no formula on when one should book profits," Angirish said.
"The year 2020 has shown that markets can fall 30 percent in a matter of days, and rise more than 80 percent from lows in a matter of months. There is no way one can time the market. If one is too worried about the market levels, he/she can balance portfolio and shift some of it to debt funds. The rebalancing ensures that one’s portfolio continues to grow," he added.
It's important to understand that mutual funds are managed by fund managers and they are in a better position to take a call on profit-booking based on their expertise and view. To conclude, if investors are confused, it is advisable to talk to a qualified financial advisor who can guide to make the right decision.
Disclaimer:
The views and investment tips expressed by investment experts on CNBCTV18.com are their own and not that of the website or its management. CNBCTV18.com advises users to check with certified experts before taking any investment decisions.
(Edited by : Aditi Gautam)
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