One of the key learnings after the Sub Prime Crisis (2008) was to book profits at regular intervals. However, it wasn’t the easiest thing to do. It required some bit of thinking and discussion. Profit Booking meant tracking the portfolio and monitoring it at regular intervals. It was contrary to the popular belief which most investors had; Buy and forget until you need the money. Moreover, if profit had to be booked some pertinent questions had to be answered:

  1. At what profit percentage should profit booking be done?
  2. Should profit be tracked at an individual fund level or at a portfolio level?
  3. What should be done with the money once profit booking is done?

These weren’t the easiest questions to answer and they surely did not have one single answer to suit all. To answer the first question: What is a good profit worth booking? This should be mutually discussed between the RM and the client. For some clients 10% was good enough while others preferred 15-20% return before it can be booked.

Also, duration of holding the investment mattered. While 10% per annum was low for some clients if holding period had been more than a few years but the same 10% was good enough if it was coming within a year of investment.

What also mattered was the nature of the fund from where the returns were coming. If a large cap mutual fund was giving 10% return in a year’s time, it was okay but it is not an exciting deal if it was coming from a PMS or a mid cap mutual fund. So the risk reward parameter also had to be discussed and kept in mind before doing the profit booking.

Some other reasons for doing Profit Booking

  1. There is change in the fund manager for the funds which are doing well.  
  2. There is a strong negative view about a particular sector where the funds are invested
  3. A financial goal is supposed to be met within 5 years
  4. Weak overall global sentiments with no positive news in sight
  5. Adjustment to balance the overall asset allocation

Some key discussions which should be done between the client and the RM are:

  • What is a good profit worth booking within 1 year/3 years/5 years of time horizon?
  • What would be the trigger to exit a fund?
  • When would it be appropriate to top up the investment?
  • What are the likely events to watch for in a year’s time, in 3 year and 5 year’s time?

Volatile Stock Market for A Decade & More

Times have changed and so has the behaviour of the equity stock market. For the last 12 years, every alternate year there had some big bad news and some big good news coming in. I have a feeling that from the year of 2008 to 2020 it would have been the most volatile period in the history of stock market, since it became relevant. Events like Tulipomania fall, the Great Depression of 1920, IT Bubble of 2000 and so on which impacted the stock market weren’t accompanied with further big news – good or bad as we have been witnessing since 2008. Right now, the cycle of good news-bad news has been creating huge sentiment driven volatility than driven by technical or fundamental analysis/data points.

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When the stock market has become so volatile, it calls for regular monitoring of the portfolio. Erstwhile belief of buying the shares and forgetting about them takes a setback in current times. We now need a systematic approach of tracking and monitoring the entire portfolio at regular intervals. That answers our second question whether profit booking should be done at fund level or at a portfolio level.

Ideal Portfolio

Pillars of Ideal Asset Allocation

Coming to our third question: What should be done with the money realised from profit booking?

There are more than 1 ways of handling this money. Some clients choose to open a second bank account and transfer this money into that account. Thereafter client does aggressive investments with this money since it does not risk the original capital. Other clients prefer to reinvest the money into debt funds to ensure profits are safely preserved and used for the financial goal which may be due within a few years. A third set of clients prefer to reinvest into the same funds thereby increasing the total capital investment. As long as the money is preserved well and leads to increase in overall wealth the proceeds from the profits can be reinvested in any way.

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