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Time to Book Profits?

I have been enjoying great returns from investments I have made since March 2005. However, the continued bull run makes me wonder whether it is time to book partial profits-Donald Francis

I have been enjoying great returns from investments I have made since March 2005. I am investing for the long term. The continued bull run makes me wonder whether it is time to book partial profits. In about six months, I am getting average of over 30 per cent returns. This rate is unlikely to be sustained, and if the returns are likely to fall, should one book partial profits? On the other hand, if I am to re-enter the same mutual funds, I will probably be doing at higher NAVs.

The SIP mechanism, helps us average out the cost, of course. So the question is, for a long term investor -supposing he doesn't need the money, should he never book profits? Should he continue to stay invested and keep making fresh SIPs and average out a return, which in all likelihood will be lower than what was achievable, if partial profits were booked? -Donald Francis

You have asked a question that is particularly of great relevance in the present scenario. See, the basic factor that leaves an investor in a dilemma is the uncertainty as to whether the markets will fall or not, and if they do when will that happen. If investors can know for sure that the markets will enter a bearish phase from tomorrow, then everyone will redeem his/ her investments to the last penny and laugh all the way to their bank. Similarly, they would like to re-enter their funds just the day before the markets are to set-off for an uphill journey. But sadly, the fact is that no one can have such a foresight. And if one tries to do this, he would be falling in the trap of trying to time the market.

The same thing applies in your case. Nobody can tell you for sure whether this is the right time to book partial profits. Who knows, if you stay invested for another month or so, your 30 per cent returns may become 40 per cent, or even more. As this response is being written, the Sensex is already flirting with 11,000 mark, and you might be getting tempted to stay invested for a little longer! On the other hand, supposing the market actually fall and your decision to book profits turn out to be a wise one, you will be faced with an even bigger dilemma as to when to re-enter. Believe me, it takes a lot of courage in the falling markets to stick your neck out and say that this is perhaps the best opportunity that I can get to invest. Time and again it has been proved that the time when the stocks are available at dirt cheap prices is when the investors are shunning them.

Therefore, the best way out is to keep investing regularly without worrying too much about the market level. What you need to do is to start shifting the money gradually to safer avenues, like debt oriented funds as the time to redeem your investments approaches so that you are not robbed off your gains if equities take a plunge at the very last minute. An ideal investment plan should be the one that works for you irrespective of whether the markets are at 11,000 or at 2,000, and keeping it focussed on your time horizon is likely to work in the best manner.

However, if higher levels of the markets cause anxiety to an investor, then maybe he can go for a SWP, i.e., redeem systematically so that he does not miss out completely on the potential upside which might be remaining. At the same time, not incurring heavy losses should the markets start to fall. But we would still recommend to focus on the investment horizon and not the level of the Sensex. Leave the job of deciding whether the markets are nearing their peak or not to the fund manager. If he feels so, he may start increasing the cash component himself in order to protect your returns.

Lastly, regarding the averaging out of your returns, please stay away from the lure of earning the 'maximum' returns which get tapered-off a bit through SIP. A handsome return over the long term is what you should aim for, and SIP remains your best bet to achieve that!

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