Mutual fund investing is a common strategy to build wealth gradually. Mutual Funds provide a means of diversifying your investments and have the potential to yield higher returns than bank fixed deposits and conventional savings accounts. Remember that mutual funds do include some risk. You can lose money if the value of your investment fluctuates.
Booking profits after your investments have appreciated is one strategy to reduce risk. Booking profits involves selling/redeeming part or all of your mutual fund units. To optimize your returns, it is important to understand when and how to book profits from your mutual fund investments.
In this guide, we’ll break down the process into simple steps to help you make informed decisions.
What is Profit Booking in Mutual Funds?
Profit booking in mutual funds means selling some or all of your mutual fund units to secure the gains you have made. It is a strategy used to lock in profits when the value of your investment increases significantly.
For example, if you invested ₹1,00,000 in a mutual fund and its value grows to ₹1,20,000, you might decide to sell a portion of your investment to take home the ₹20,000 profit.
Profit booking is essential because markets can be unpredictable, and gains can disappear if the market trends downward. It helps safeguard your earnings and aligns your portfolio with your financial goals. However, it’s important to have a plan before selling, as premature profit booking might reduce your long-term wealth creation potential.
Profit booking is a common practice in the financial markets and is often done to:
Protect Gains: Ensure that your profits are not lost if the market goes down.
Rebalance Your Portfolio: Adjust your investments to match your financial goals or reduce risk.
Meet Financial Needs: Use the profits for specific expenses or life goals.
While profit booking helps you secure gains, it’s important to plan it wisely. Selling too early might reduce your long-term growth while waiting too long might lead to losing the profits you’ve already earned.
In short, profit booking is about knowing when to effectively sell your investments to achieve your financial goals.
Should I Book Profit in Mutual Funds Now?
Deciding whether to book profits in mutual funds depends on your financial goals, market conditions, and risk appetite. Here are a few scenarios where profit booking might make sense:
You’ve Reached Your Financial Goal
If your investment has reached the target amount you aimed for, it may be a good time to book profits and use the money for your planned expenses.
Market Is Overvalued
If the market is performing exceptionally well and experts believe it is overvalued, booking profits can help protect your gains.
Portfolio Rebalancing
If one mutual fund has grown too much compared to others in your portfolio, you can book profits and reallocate the money to other investments to maintain a balanced portfolio.
Need for Funds
If you urgently need money for a personal expense, you can book profits from your mutual funds.
However, avoid profit booking solely due to short-term market fluctuations or panic during market corrections. Mutual funds are designed for long-term growth, and staying invested often yields better results.
Mutual Fund Profit Booking Strategy
Here are some effective strategies for booking profits in mutual funds:
Set a Target
Before investing, decide on a target return. For example, you might set a goal to book profits when your fund delivers 15%-20% returns. This ensures disciplined profit booking without getting influenced by market noise.
Partial Withdrawal
Instead of withdrawing the entire amount, consider booking profits partially. This way, you lock in some gains while keeping the remaining investment to grow further.
Goal-Based Profit Booking
Align your profit booking with your financial goals. For example, if you’re saving for a down payment on a house or a child’s education, book profits when you reach the required amount.
Regular Portfolio Reviews
Periodically review your mutual fund portfolio. If a fund has performed exceptionally well, you may book profits and reinvest in underperforming or more promising funds to balance your portfolio.
Avoid Emotional Decisions
Don’t book profits out of fear during market corrections. Mutual funds are long-term investments, and markets tend to recover over time. Stick to your strategy.
Remember, profit booking should always align with your overall financial plan. If you’re unsure, consult a financial advisor for guidance.
Steps to follow for Booking Profits
- First, understand the reason behind booking profits
Before you book profits, it’s important to know your objective. Are you looking to meet a financial goal, reduce risk, or rebalance your portfolio? Having clarity on your purpose will guide your decisions.
- Targeting for Profit Booking
Make a reasonable goal for the returns on your mutual fund investments. For instance, if you decide to earn 15% returns p.a., then it would make sense to book profits if your fund has reached your target of 15% annual return.
- Rebalance Your Portfolio
Fluctuating returns from various assets (Example – Equity, Debt, Gold) might cause your investment portfolio to become imbalanced over time. You may maintain your intended asset allocation and adjust your portfolio by booking profits.
- Systematic Withdrawal Plan (SWP)
Rather than taking out all of your gains at once, it might be prudent to use a Systematic Withdrawal Plan (SWP). This lets you take out a certain amount every month while the rest of your investment keeps growing.
- You can withdraw Partial Investment
You don’t always have to exit the fund entirely. Partial redemption allows you to book profits while keeping a portion of your investment intact.
- Keep in mind, Taxation Angle
When there are profits, there will be taxes. In Mutual Funds as well, Capital gains tax is applicable. Please note that the taxation of short-term and long-term capital gains in the case of Equity & Debt differs. Before booking profits, be careful to take the tax impact into account. At present, capital gains up to Rs. 1.25 Lacs p.a. from the Equity Category are exempt.
- Reinvest Wisely
Decide how to spend or reinvest the money once you’ve booked profits. Prepare a strategy, whether it involves reinvesting in other mutual funds, shifting to safer assets, or utilizing it to achieve a financial objective.
A redemption request can be sent online. The procedure will change based on the mutual fund provider you prefer.
Don’t allow feelings to influence your choices. Making logical choices on when to book profits is crucial. Don’t allow greed or fear to guide your decisions.
You can protect your wealth and lock in your income by booking profits. Making sound decisions about when and how to do it is important. You can ensure that you’re making the right decisions for your financial future by following the above-mentioned steps.
I hope this blog post was helpful.
Final Thoughts
Booking profits in mutual funds is as important as investing in them. It ensures you lock in gains and align your investments with your financial goals. Follow these steps, stay disciplined, and consult a financial advisor if needed. Happy investing!