Posted by: sanjayshetty | July 6, 2005

When to book profits?

A recent interview of a mutual fund manager on a TV channel threw up an interesting question from an investor who had called in.

The caller said he had made a handsome return on an earlier mutual fund investment. He wanted to know whether he should book his profits.

Pat came the reply of the mutual fund manager. No stay invested for the long term. If you don’t require the money now why book profit.

I was quite taken aback by this reply. Some questions which came to mind,
what happens if when the investor(caller) wishes to book profits the market isn’t doing great?
why shouldn’t he book profits now when he is making handsome profits?

I conculded the reply given by the mutual fund manager is just the standard sales pitch given by them(mutual funds) to all people. Stay invested for the long term, always…

Frankly giving a reply to the callers question is kind of difficult cause one doesn’t know the exact nature of the investment. i.e. the quantity of money invested, the amount of profits he’s making etc. But going by the callers statement that he’s making handsome returns, common sense would be to book profits.

Infact the best investment advisors say, that before getting into an investment one needs to decide, the profit/loss target which one is ready to accept and then stick to it.
For e.g. if you think that you’re going to be happy with a 40% return; when your investment reaches that stage, BOOK profits. Don’t wait hope and pray that you will get more.
Moreover don’t be disappointed if that investment in time yeilds a higher return. Be happy that your investment has met your target. Greed is often the reason for one’s downfall. Quite a few investors who’ve made handsome gains in their investments often are left high and dry when situations reverse and end up in a loss… waiting for that further upmove in markets and their profits.

Well let me add that sometimes one might be in a situation where circumstances have changed in a very favorable way, at that stage it might make sense to set a further higher target and wait for that. But most of the times it makes most sense to book profits when one’s targets are met.

Sanjay Shetty.

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