Hope you & your family are safe and healthy. I am sure looking at your investment portfolios and the current stock market surge must be making you feel quite happy. There may be conversations/thoughts around it to book profits right now and reinvest next fall.
There are two kinds of people in any bull market. There are people who ride the market throughout being bullish. Another set of people feel markets have gone up too much too soon and it is set to correct. They feel it is time to book some profit, take some money out, which can be put back into corrections. This time is no different.
I am sure most of us are part of the second set of people, thinking of booking profits and wait for a correction to redeploy it. Is it the right thing to do so with your mutual fund portfolio?
Let us take an example. I studied a SIP done in one of the best performing large-cap mutual funds for the last 5 years. The objective of this study was to find out the following :
- how many times it had given 10%+ positive returns where investors could have booked profits and
- how many times it corrected to -5% returns so that the booked profits could be reinvested.
Here is the outcome of that research :
|Option 1 – Continue SIP||7,20,000||10,63,810|
|Option 2 – Withdraw at every 10% hike and invest at every 5% fall||7,20,000||
Assumptions to this study :
- 10,000/- SIP done on every 5th of the month
- Capital Gains Tax & Exit load not factored in the calculations
- Booked profit is reinvested in the same fund
- SIP Start date is 5-Jan-2015 and continued till date (Dec’2020)
- SIP amount 10,000/-
During this period, 72 installments have gone by and there were 6 such opportunities to book profits (ie > 10% return on invested amount). There were 2 opportunities to invest back the booked profits. ( ie -5% returns from the invested amount).
If you notice the above table, the person who has not disturbed the SIP, stood to gain over 5 year period of time over the person who actively managed the SIP portfolio to book profit and reinvest.
This is without including the Short term /Long Term Capital gains tax and exit load if any on such booked profit.
As always, I would like to reiterate the fact that equity investing is for the long term and requires tremendous amounts of willpower to manage the emotions both during peaks and falls of the markets. The one who masters this stands to gain.
There will be questions crossing in your mind right now, i.e If I don’t book profits, how do I create cash flow to take advantage of the markets? The answer again is quite simple :
- Keep asset allocation in place for Emergency funds & your mandatory life goals. ( Non-negotiable this asset allocation should be)
- Keep unwanted expenses away and try to create cash flow from avoidable expenses.
- Earn more by creating some side gigs.
- First priority is to build multiple assets so that it starts creating cash flows.
One parting note, stay calm in both types of markets, returns from equity always are non-linear, so don’t get over-swayed by high returns or large corrections.