Is profit booking from equity mutual fund a crime?

I have never seen any AMC relationship manager telling any of their client to book profit from equity mutual fund. Distributors are also guided accordingly by AMC RMs and they also guide their client not to book profit as it is meant for long term i.e. till the goal.

First of all both investors and distributors should think why AMCs will like their AUM to go down. Not only the fund is earning good revenue but officials are also earning good bonus/incentive because of higher AUM.

May be distributors also thinking that if their AUM goes down then they might also earn less trail commission and so keeping that same “stay long term” mantra they also tell their investors not to book profit.

Its investors money on which both are enjoying the fruit. Investors should always look, evaluate and do what is beneficial for them. If someone does not book profit then still in long term that investor will get good return but booking profit does not necessarily mean its wrong. All depends on situation.

Lets look at 2 situations.

Situation 1: Assuming that if someone has invested 100 and in one case there is for 2 successive year there is 50% growth and 3^rd year 50% fall.

	Year beginning	Growth	Year end
Year 1	100	50%	150
Year 2	150	50%	225
Year 3	225	-50%	112.5

 

Situation 2: Assuming that if someone has invested 100 and in one case there is for 2 successive year there is 25% growth and 3^rd year 25% fall.

	Year beginning	Growth	Year end
Year 1	100	25%	125
Year 2	125	25%	156.25
Year 3	156.25	-25%	117.1875

 

From the above 2 examples in which situation after 3^rd year the net growth is more?. It's situation 2.

Let us look another example

Situation 3: Assuming that if someone has invested 100 and in one case there is for 2 successive year there is 75% growth and 3^rd year 75% fall.

	Year beginning	Growth	Year end
Year 1	100	75%	175
Year 2	175	75%	306.25
Year 3	306.25	-75%	76.5625

 

Situation 4: Assuming that if someone has invested 100 and in one case there is for 2 successive year there is 20% growth and 3^rd year 20% fall.

	Year beginning	Growth	Year end
Year 1	100	20%	120
Year 2	120	20%	144
Year 3	144	20%	115.2

 

Situation 5: Assuming that if someone has invested 100 and in one case there is for 2 successive year there is 15% growth and 3^rd year 15% fall.

	Year beginning	Growth	Year end
Year 1	100	15%	115
Year 2	115	15%	132.25
Year 3	132.25	15%	112.4125

 

When I again look at situation 3,4, and 5 then its very evident that if there is very high gain the recent 2 years and if there is reversal at same rate for next year part of gains are wiped off. In fact in situation 3 it has gone less than the capital invested and loss is there.

The higher the gain in recent past more is the risk if trend reverses. Investor should always see that volatility w.r.t long term average return and at some stage should book at least some profit.

Being long term in investment does not necessarily means to be in long term in same fund. The short term performance of that fund should be viewed. More the high return in short term vis a vis past long term average return then some profit needs to be booked and shifted towards another good fund within same peer group where reversal risk is less. Booking of profit and movement of money should happen within 3-5 funds of same peer group.

If one does this then that investor is still staying in long term in the funds. Yes, one might end up paying capital gain tax but if net of tax it is advantageous for investor then still can be considered.

My view is total investment (in a portfolio of 3-5 funds within same category) is for long term but fund wise evaluation should be of short term also (in every rolling 3 years/5 years) and lateral movement of money should happen if need arise so.

Investor should be in love with their money and not any particular fund. At present we are in situation where this 3/5 years evaluation and rebalancing required.