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Profit-Booking in MFs

Funds and stocks have an important common ground for investors

Should profit-booking in mutual funds be undertaken just like in stocks?

Generally, one should do it. Talking from the equity context, it should not be your motto to invest in a mutual fund for a short-term period based on its performance, again over the short-term - one should always invest for a long-term period in equity, though the temptation to resist this when the markets are high is very difficult.

However, in case you are investing for a short-term period, then always go for profit-booking. After you have had 10 or 20 per cent profit, you should always take the stop-loss option. When we invest out of greed thinking that we have to get big profits in as short a time as possible it carries tremendous risk because, if there is a sudden downhill move by markets, then it becomes very difficult to recover and there are heavy losses to account for. When there is a 5 per cent downfall, then we expect that the markets will regain or have a turnaround and just in a flash, we witness a fall of 50-60 per cent and recovery becomes very difficult, if not impossible. So, irrespective of opting for profit-booking, one should also always take the stop-loss option.

A permanent loss’ disadvantage is that the trust in investments is lost and then one is forced never to think of investing in a falling market.

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