Market At It’s Peak – Should One Book Profit In The Long Term Portfolio of Mutual Funds?

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.