May 04 2015 : The Economic Times
(Mumbai)
|
Dhirendra
Kumar CEO, Value Research
|
Booking profits is an equity traders' concept that
mutual fund investors must leave behind
Is it time for profit-booking? It's a typical
question most investors often ask. If you are a mutual fund investor and you
are asking this question, you could be making a big mistake.To be fair, this
question is an obvious one in a time like the current one. The stock market has
slackened in 2015 after a strong surge in the previous year. This idea of
profit-booking (or profit-taking) is an integral part of equity investing
culture the world over. Investopedia defines it as “The act of selling a
security in order to lock in gains after it has risen appreciably.“ You buy a
stock, and when you feel it has risen as much as it is going to over whatever
the time period you are interested in, you sell it. That `locks in' the gains.
It is a common saying among equity investors that
no one ever lost money by booking a profit. That statement sounds like a
clincher, and makes profit-booking a no brainer. The problem is that investors
in equity mutual funds have also adopted this idea. Here's a typical query
among the ones that I've been receiving from equity fund investors, “I've been
investing in XYZ fund for a long time. Now that the market has stopped rising,
I have redeemed all my units in order to book profits.Where should I invest the
proceeds now?“ What do you think is the correct answer to this question? Here's
mine. If the investor has something to spend the money on, he should do so.
Otherwise, he should invest it in an equity fund. And since XYZ fund has given
him good gains, that's probably a good choice.Sounds like I'm making a joke,
but that's probably because in equity funds, profit-booking just for the heck
of it is a no brainer, but in a different sense of the phrase.
Booking profits means that you think that an
investment has reached a point when it has nothing further to offer in your
time-frame, and you would need to move the money to some other stock. It
doesn't mean that just because a certain amount of profit has been made, you
must `book' it. If you immediately move the money to another investment, then
you've un-booked the profit. This makes sense only if, for some reason, it's
important for you to count the profitability of each stock separately. If you
are thinking of your investments as a portfolio whose gains matter as a whole,
then it doesn't make much sense.
In any case, in equity funds, there is already
someone -the fund manager -who's mov ing in and out of stocks that are there in
the portfolio of the fund, as needed. Selling funds just because the market
went up and has now had a bit of a pause makes no sense as an investment
strategy.
Apart from a slavish adherence to a misapplied
principle, I think the roots of this profitbooking in funds lie in simple
nervousness.There is a special breed of investor who gets nervous at every
uptick in the nervous at every uptick in the market. Every paisa gained brings
to them heightened nervousness about whether it's about to be taken away. And
when the markets pause even a bit, they scuttle away like a surprised mouse.
I guess every investor is a slave to his or her own
psychology, but the nervous types' behaviour is especially self-destructive.
It's likely that most of these people will pull out their money now. At every
fluctuation in the market, they'll feel happy that they've saved their profits.
However, eventu ally, when the market is much higher, they'll invest again. At
that point, they might well be at a higher risk.
At the end of the day, this profit-booking is a way
of trying to time the markets -something that rarely works out for investors.
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