Profit booking in Mutual Funds vs Stocks

 

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Mutual Funds have a very different outlook as compared to investment in stocks. The MF isn’t focused on specific stock but rather the investment is distributed among the potential companies of various sectors. The investment strategy helps the fund to minimize the risk and handle volatility is better way. The investment made after thorough research helps the portfolio recover fast even after any correction as potential in a company is well studied before investment. Therefore, profit booking made in full or partially in mutual funds is very subjective as acted before nearing your goal would hamper wealth accumulation. The following are the reasons why profit booking is not advisable even if markets are peaking and you are not nearing your goals.

Long term gains of MFs could be far more than in Stocks-

Gains from Stocks have made wealth for many who bought shares of the company which has really grown many folds but it’s also true that many blue chip companies of one time have miserably failed for some reason or other. Thus, it’s a matter of some good fortune and solid continuous research to make a big wealth for the family.  A Sensex return is 16% plus over 41years but half of that came from just 3 good years. However, MFs especially non thematic held for long term never disappoints investors and in past too it has helped them with almost guaranteed accumulation. Investors investing in MFs outsource the research to a fund management team who has access to all the inputs regarding the company to evaluate potential of the company. Thus, a regular monitoring by a specialized team helps to make alpha over benchmark i.e. beat index by a reasonable margin to give you returns surpassing inflation too. Profit booking denies you potential growth of funds in long term and one who doesn’t have long term view may choose to stay away from equity MFs.

Diversification of sector in MFs investment makes it less volatile-

While investing in stock means you bet on a company or companies to perform. However, some companies could fair well and some might not over period of time which could hamper your returns negatively. MFs portfolio of scheme is well diversified among various companies of different sectors which makes it less volatile. Well researched stock selection in potential sectors with a good business model and good management might take time to show it’s worth or the price may fall with the correction in the market but would outperform at some point of time to enhance returns in the portfolio.

Profit booking in MFs, full or partial can disturb accumulation-

Profit booking is linked to timing the market and no one specializes in this wishful art. Investors in stock market try to do the same but few are able to get success. With the rising market, investors who find attractive returns in the portfolio gets tempted to book profit without having a product in hand to invest which could potentially give similar returns.  Let’s take an example of fund where an amount of Rs.2 lac is withdrawn from accumulation through SIP gives you clarity how detrimental so called profit booking could be;

    Monthly SIP Amount 10,000/-
    Total Investment Amount in 10 Years 12,00,000/-
    CategoryCurrent Value (Lakh)XIRRCurrent Value (Lakh)XIRR
    Large Cap25.6014.35%If   2 Lakh17.9412.43%
    Mid Cap33.0119.03%Withdrawn on21.7916.38%
    Small Cap34.3519.76%1st July 201322.6217.13%

      Note

      • Data till 23-July-2021.

      • SIP Date has been considered 1st of every month.

      • SIP Period has been taken from July 2011 to June 2021.

      • A scheme for each category has been selected for illustration purpose only.

      We all should look at accumulation rather than returns as any investment held for long term wouldn’t fail to perform. This is true for most of the assets and short term gains or losses shouldn’t excite or depress you. Higher short term returns are far lower in accumulation as compared to lower returns in an investment held for long term i.e. Rs.10 lakh investment fetching 18% pa returns in 3 years will be Rs.15,40,000/ and same investment held for 10 years generating 12% pa would accumulate to Rs.22 lakh. There is saying and its worth following;

      “When Money realises that it is in Good Hands, it wants to stay and multiply in those hands”