Should I sell my equity mutual funds and book profits now?

Booking profits in equity mutual funds should depend on your financial goals and performance of individual schemes and not on the basis of overall surge in equity markets.

Suresh KP
Myinvestmentideas.com

Markets are near the peak. As an investor, you might be getting doubt that should I sell my equity mutual funds to book profits? Where is the market heading and how long it would sustain at this level? While it is almost impossible to predict where exactly stock market would be in coming years, if you are investing in equity mutual funds, here are some tips which you can consider before taking a sell decision about your equity mutual funds.

Some of the factors which have driven / driving stock markets to peak levels:

New Government and New policies boosting SENSEX to reach peak: One and half year back, SENSEX was at 19,000 levels, now at 28,500 levels indicating a 50% rise in SENSEX stocks. The SENSEX has been hovering around the similar level of 19,500 all along since 2007. What made the difference is the expectation from the new government and new policies / trust being built after the new Government has been formed in the last 1 year. Though you may not see a rise in SENSEX in a similar manner, SENSEX could move in a positive direction with correction on and off.

Companies are getting fair valuation: In the last 1 year, investors are seeing true valuation of the large cap stocks. However, mid-caps and small-caps are over-valued. In case there is any major correction, mid-cap/small-caps would take a huge beating.

Increase in FII's inflow: In the last 1 year, FII's have pumped net of Rs 82,000 Crores (Source: Moneycontrol.com) in to Indian stock markets which indicates increase in FII's trust in Indian stock markets.

Well, all these are fine but that does not answer our question: Should I sell my equity mutual funds and book profits now?

I have indicated some of the major factors which influenced the stock market to reach at this peak level in the Iast one and half year. If you have invested in equity mutual funds over a period of time through the Systematic Investment Plan, you might have seen good returns for your mutual fund schemes. This growth may continue in future, however, not predictable. Hence, your decision to sell an equity fund may depend on the following factors:

Sell your fund if it is under-performing compared to benchmark: Compare your mutual fund returns with the benchmark. If it has out-performed, you should continue to keep your equity funds. If it is under-performing, you should review and exit appropriately. For example, if you have invested in X mutual fund scheme which gave 12% annualized return in last 5 years and benchmark has given 15% return, you know for sure that your fund has underperformed. Review such funds, book profits and exit.

Sell if you have met your financial goal: Many of us would have been investing in mutual funds keeping our financial goals in view. With this market boom, if you have achieved your financial goal, you can sell your mutual fund, book profits and use for the purpose you have planned. For example, if Mr.Akhil Kumar has been investing in the stock market for the last 15 years to create a retirement corpus. Now he is nearing retirement and his mutual fund portfolio is worth Rs 1 Crore, which was his retirement goal. He should book profits and invest in debt schemes which provides fixed income considering his age factor.

Sell your fund if it does not meet your goal: If you have wrongly invested in a fund by mistake with an advice from an advisor or friend, you should review it carefully and exit appropriately. E.g. if you have bought sector based mutual fund scheme with an aim to have a good secure education for your child, it is incorrect. Sector funds are high risk and can wipe your capital itself.

Concluding remarks: No one can time the market. Investing through SIP in mutual funds for long term can provide good returns. However, you should also know when to exit. Understanding these concepts would help you to plan well.

Readers, what do you think about these ideas? Are you selling your mutual funds considering any other parameters? I would love you hear from you.

The author of this article is founder of Myinvestmentideas.com. He can be reached at suresh@myinvestmentideas.com for any clarifications.