Basics of booking profits

By Srikala Bhashyam, ET Bureau

When the Sensex came sliding down to the 8,000 levels last year, there were many investors ruing their investment strategies.

Many of them had failed to book profits even though their portfolios had more than doubled in value. They were not to be blamed as the markets in the preceding years hadn't made them think of profitbooking .

The investor sentiment in the current environment, however, is completely different. Though the markets have been on the rise in the last 12 months, individual investor participation has been rather muted because of lack of conviction.

Even those who stayed put with their investments have been rather keen on selling out despite the long tenure for their investments. Those who didn't resort to profitbooking are wondering whether they should exit considering the Sensex has risen by more than 100 percent in one year. Irrespective of the levels, profit-booking is an integral component of wealth management , and hence, one should follow it at all times.

Fix a target:

One of the simple methods of profit-booking is to keep a target for your profits . The percentage or amount should be dependent on your tenure and risktaking abilities. For instance, if your portfolio created last year, would have enabled you to earn over 100 percent profits but does not necessitate a sell strategy as you had the opportunity to invest at a level which may not come up very often.

You may not have the luxury of three-digit returns at all times and instead, may have to settle for a lower percentage , going forward. In fact, for your short-term portfolio, booking profits with a tab on percentage helps you avoid being caught on the wrong foot.

In line with needs:

One of the basic objectives of a portfolio is to generate cash for expenses. That would mean you should have the required funds for your needs when the event arises. As a result, profit-booking becomes crucial in equity as the asset is highly volatile and also cyclical with its performance . You should not be made to dip into capital when in need of cash. The best way to avoid such a scenario is to book profits well ahead of the event.

For instance, parents, building corpus for a child's education over a 10-year period should start booking profits from the portfolio from the eighth year onwards and the focus of the investment strategy should revolve around the corpus creation for education.

STP to build corpus:

The use of STP (systematic transfer plan) option need not be restricted to transfer of funds from debt to equity alone. It can be used the other way in case of profitbooking.

For instance, in a rising market, you can fix a target for yourself for shifting from equity. The strategy holds good in booming market conditions and when liquidity chases stocks despite high values.

Irrespective of the options on hand, one needs to keep in mind a number of other factors such as macro environment, the fundamental strength of a stock and also, the technical indicators which drive the market momentum.

But the key determining factors are the liquidity needs and risk-taking abilities of an individual as they are the bedrock of any investment planning.