Tuesday, April 28, 2015

To book profits or not? Try rebalancing portfolio instead

Below is the verbatim transcript of Rustagi's interview with CNBC-TV18.

Q: Gold has slipped below USD 1,400 per ounce levels and a lot of investors have again highlighted the dilemma of whether to stay invested or book profits when the going is good. In fact, equity investors face this dilemma time and again. So should they continue to stay invested? How should one book profits?

A: There are two major decisions to be made for any investor especially when it comes to asset class like equity and gold because it becomes a bit of complicated because talking about the current market scenario, for example one has seen the market going up and also crash is seen on the gold side. Therefore, it becomes a bit difficult to decide as to whether one should be staying investing or should be exiting from this. So, it is very important for investors to have a strategy in place.

Things to know before redeeming investments

As I mentioned earlier, one dilemma is to buy and that can be taken care of especially when one is investing in a disciplined manner by investing regularly but when to sell remains a tricky one. Therefore, it is important for investors to have a strategy in place.

As investors has the tendency to allow portfolio to ride on especially when the going is good but when they face with volatility, they become very nervous and so one see investors taking decisions in a haze either getting out of the asset class completely or allowing the portfolio to continue in the hope that there will be some recovery.

I think both decisions expose them to some kind of risk and that is why it is important for every investor to have a strategy in place once the strategy is to rebalance the portfolio. Rebalancing means to bring the asset allocation back to the original level. That is of different asset classes like equity, gold or debt.

Here's how you can generate extra returns on gold

How it is done is that when an investor has an overexposure to equity from the expected level, he will book profit when the going is good and he will invest the money when market is down also rebalancing is very important because every portfolio is designed to tackle an accepted level of risk by doing nothing when the going is good basically exposes to much higher risk. However, I believe that the profit booking should be done when the allocation drifts by 10 percent or more. Doing it frequently also defeats the purpose.

Second, any other investor who wants to book profit but is not sure about when to do it then I would like to mention here about the mutual fund investor; those who invest in equity or equity oriented balance fund can opt for a dividend payout option. These funds typically pay dividend once in a year. The tax-free nature of this dividend makes the whole exercise very tax efficient and also they do not have to worry about timing the market. Therefore, it is evident that booking profit is necessary otherwise one is exposing oneself to more risk.

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Excerpts from Markets and Macros on CNBC-TV18 Watch the full show »
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Tags: Hemant Rustagi, Wiseinvest Advisors, Gold, investor, equity, allocation, mutual fund, ETF, asset allocation, ICICI Prudential Focused Bluechip Equity Fund, IDFC Premier Equity Fund
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