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BooksExplained: Should you book profits now?

Explained: Should you book profits now?

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Written by Sandeep Singh

November 6, 2020 3:30:09 am
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                                                    </span><span class="custom-caption"> <span class="ie-custom-caption">London starts a newly imposed lockdown. Given that fresh lockdown measures could impact economic recovery, investors can book some profits now. (Reuters)</span></span>As the haze around the outcome of US elections began to clear on Thursday morning, the benchmark Sensex at BSE and Nifty at NSE jumped by 1.8% and inched closer to their respective all-time high levels seen in January this year. The Sensex closed at 41,340, just 604 points or 1.4% lower than its higher ever closing of 41,945 on January 17, while the Nifty closed at 12,120, just 2% from its closing of 12,362 on January 14.

So, should you book some profits at this time?

Amid a fresh wave of Covid-19 infections across the world and a looming threat of lockdowns, investors would do well to book some profits on their investments when the market is on a high. With a vaccine still some time away, uncertainty remains over the global economy. Several countries in Europe have imposed new lockdown measures amid the rise in new cases and fatalities. Keeping in mind the fact that fresh lockdown measures may hurt economic recovery and stock market movement, it wouldn’t be a bad idea to book some profits on investments that have achieved their targeted growth.

Some profit booking also makes sense at this time because many feel that if the Covid-19 concerns remain for an extended period of time, then investors will get an opportunity to invest in the same assets at a cheaper valuation at a later date.

It must always be remembered that while investments should be made in a regular and disciplined manner, redemption or profit booking must be planned and executed when the markets are on a high or the expected gains have been achieved.

When the Sensex fell by over 35% from the highs of January to 25,981 on March 23, there was a sense of anxiety among investors. Many rued the fact that they had missed out on booking profits and reducing their equity exposure when the indices were trading at all-time high levels in January. No one knew that the market would regain its levels in 10 months and provide the same opportunity again. Now that this has happened, investors would be wise to book and keep some profits aside, to reinvest when there is a dip.

Where should you book profits from?

It is important to note that while direct investments in stocks of various companies may have generated good positive returns, a number of mutual fund SIP investments may not have generated significant enough positive returns for investors to book profits over the last 3-5 years. Therefore, experts say that it may be a better idea to book profits from individual stock investments rather than mutual funds. The decision to pull out of mutual funds may, however, depend upon the age of the investor, the period of investment and whether the investment objective has been met.

Some feel that investors should look for companies that are not performing too well during the pandemic period but have seen a significant jump in share prices, to book profits.

“As second-quarter results are coming out, investors can figure out companies that are strained on the business front but have seen a sharp jump in their share prices. I feel that investors should book profits in those companies, as they will get an opportunity to buy them at a later date and at cheaper valuation,” said C J George, MD, Geojit Financial Services. He added that one should remain invested in companies that have done well even amid the constraints of the last six months, as they would do well going forward.

What should mutual fund investors do?

The strategy should depend on the life-cycle of an investor. If the investor is young, say in their 30s or early 40s, they can stay invested for the long term and can let the near-term volatility play out. But for an investors who is in their late 50s and is approaching retirement, it is important to seek this opportunity and reduce their equity exposure and start deploying funds into safe asset classes where there is no risk of capital erosion.

“It is a good time for investors to rebalance their portfolio. Investors who think they have high exposure of equity can bring it down and move to debt,” said Surya Bhatia, founder of Asset Managers, a financial advisory firm.

Where should you put your money?

Even as one books profit, the more important aspect in these times is to figure out where to deploy that money. Investors can look at various options. The first is to keep the money in liquid form and put it in bank fixed deposits, G-Secs or a debt mutual fund scheme for a period of three months to six months, and deploy it into high-quality blue chip companies when there is a dip in the market.

The other option is to look for high-performing companies in sectors that are still trading significantly below their pre-Covid levels in January 2020. A fund manager with a leading fund house said that investors can look at strong private sector banks or a banking sector fund, and can also look to invest in dividend yield funds or special situations funds.

Will there be long-term capital gains tax?

In his Budget announcement on February 1, 2018, then Finance Minister Arun Jaitley announced a proposal to impose long-term capital gains tax of 10% (without indexation) on gains exceeding Rs 1 lakh arising from sale of listed equity shares or units of equity-oriented mutual funds. The government, however, said that all gains up to January 31, 2018 will be grandfathered and not attract tax.

So, if investors book profits where the capital gains are over Rs 1 lakh (since February 1, 2018), they must be ready to pay LTCG tax at the rate of 10% on all gains exceeding Rs 1 lakh.

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