Market is forming new high on a daily basis. Is it the right time to book partial profit on the long term SIP portfolio of a mutual funds or remain invested?
A reader asked a question in the AMA on March 15th
Hi Shabbir,
I have SIPs in some of the best funds like:
- Mirae Asset Bluechip
- ICICI Discovery
- HDFC midcap Opportunity
- DSP blackrock
It’s been 3 years so far in SIPs and I have accumulated good sum with good annualized returns >20% so far.
(These SIPs are aimed for ~10years or so)
Since the market is at peak and we all want to maximize our profits.
So, how is the idea if I redeem all the units of prior to one year (to avoid tax and to take advantage of market volatility) and put that amount in one debt fund and make STP for 2years (24nos equal installments)??
Kindly suggest.
Thanks & Regards
The question has many important aspects and we had a discussion about them in an email. Will share and elaborate here for everyone because I am sure many more of my blog readers will have a similar question.
Let me call the user as R.
What Mr. R is trying is
Maximize returns by booking profit but it means is reduce exposure to equity. Mr. R is intelligently booking only profit where he isn’t taxed to maximize the profits further.
Why I think booking profits may not be the right decision?
High chances that it may work against Mr. R. Let me share you how.
What he (I know Mr. R is. male) is trying to is book profits at its peak but one should also consider what is the likely scenario of market correction from here and by what percentage.
Nifty as on 19th March 2017 is at 9160 which is at all time high but technically Nifty has formed a base at around 7900 forming a double bottom and moved from there and in a very bad market conditions, it is very unlikely from here that we may break 7900 again on the downside.
So I don’t see more than 10% of correction in the very near future and this is the MAX that can happen if most of the things go wrong (Trump, GST, FED etc).
Now he wants to switch out of asset class that is giving 20% return to 7 to 9% returns and let the money remain in more secured asset class for the next 24 months and slowly moves into equity.
What if the market doesn’t correct in next few months and once most of the STP are in equity and then it corrects?
What one should do instead?
The market is at all time high with all time high valuations and still climbing higher each given day. Looks like a euphoria.
We know in a euphoric time, it is advisable to stop chasing the market and wait for the correction.
So smart investors do not put their money in a euphoria but sit tight on their good investment and wait for the correction. We have examples of Warren Buffet, Rakesh Jhunjhunwala.
So don’t book profits because you may get the feeling of being left out. Instead stop, your SIPs if you have even a slight plan of booking profits. Let that money accumulate to increase your cash levels to utilize a market correction in the future.
This is what smart investors do. They sit tight on their investments and accumulate cash levels from various sources and we retail investor can stop SIP to accumulate cash.
Cash accumulation can act as a hedge to take advantage of the movement of the market in either direction. If the market goes up, you are invested and if there is a correction, you have the cash to deploy.
What am I doing?
I am done for this years of ELSS investment. So I will continue to hold my portfolio but the fresh money will remain in my bank account till I see a significant correction in the market. The correction can even mean the market may be even higher from the current levels but I want to see a correction before I put fresh money in the market.
Thanks …..ur post help’s me to educate myself…..
Dear Shabbir,
I am regular reader and irregular commenter; today I decided to comment.
As many of us, do not participate regularly and have not some much of discipline, we tend to either use up the cash for alternates, or become busy to find time to invest. So if we continue the SIP, the Fund Manager will take a better and higher responsibility to maximise the value.
Next instead we could also choose multi- asset mutual fund, which permits the Fund Manager to deploy funds in alternates, in situation, which is not conducive for further investment.
Yes they should do that for us but then equity mutual fund manager even when they foresee a correction, they cannot remain in cash beyond a certain level or can remain short in market.
Yes Multi asset can be a good option and in choppy and volatile market, multicap and balance funds can perform better.
I completely agree with your thoughts.
I also think due to Nifty is back to peak valuations again feel like Nifty will peak out and come to corrective mode. Need to wait for 2 or 3 months.. Let me know when is the right time to initiate buying again..
I think it will be longer than 2 to 3 months but let us wait and watch.
Shabbir, don’t you think mutual fund house do the fund management for us and we can just leave everything to them?
Yes we can but then we have to understand that mutual funds when even foresee a correction, they cannot remain in cash because of rules and regulations.