Don't rush to book profits

At best, sell 20-25% of the portfolio, in stocks or funds that have done exceptionally well

The BSE sensitive index, or Sensex, is up 1,200 points in two trading session and going by experience, both mutual fund and stock investor rush to sell because they see some upside on their past investments, finally.

Ask yourself this one question before taking the sell call – how richer are you? The Sensex has moved to 23,500 and the Nifty to 7,000 points – an all-time high for both benchmark indices. But it is barely 12-13 per cent up since its earlier high in January 2008 and December 2010.

The first argument against rushing to book profits is that the market, even after the recent surge, isn’t too expensive. That is, the Sensex’s trailing price-to-earning at 17.88 is lower than the 10-year average of 18.71. The same multiple in 2008 and 2010 highs was at 20.94 and 20.11. So, there is a strong likelihood that this rally may have more legs.

Some market experts believe even if there is uncertainty at the Centre after election results on May 16, things may not be too bad over the longer term of two-three years because the economic scenario in the US and Europe seem to be getting better.

Says Rishi Nathany, certified financial planner: “Retail investors should not rush to sell now because longer-term ones have not really made too much money in the past six years. Equities are expected to do well, if not immediately, over the next couple of years.”

Then, how much profit are you really sitting on? If you were one of the late entrants in the 2008 and 2010 rallies through an index fund, you are not sitting on a significant profit. Only 17 stocks, which comprise the existing Sensex, have given positive returns since December 2010. And, only seven have returned over 50 per cent.  Three stocks – Tata Consultancy Services, Sun Pharma and ITC – have returned over 100 per cent. Many stocks like Axis Bank, Cipla, Infosys and ONGC have returned below 10 per cent in the same time period.

Others like investment expert Gul Tekchandani feel investors could raise some cash in this rally. “If you are sitting on profits of over 50 per cent in three years, sell some stocks, around 25 per cent of the portfolio, to raise cash. There are many stocks in A and B groups that have done exceptionally well. There will be more opportunities in the future because the market will not go one way for two-three years, and in times of correction, you will need cash to invest,” he says.

His argument: Since the economy has been growing at five to six per cent annually, stock market investors should ideally get returns of 10-12 per cent. “When such investors are making substantial money in certain stocks, they should sell instead of holding on for more profits,” adds Tekchandani. Most believe that given the sudden surge, retail investors could be seeing an opportunity to make money before things possibly go haywire after May 16. A little patience would help.