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.

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You are Risk Manager (a Saarthi like Bhagwan Sri Krishna) of your client

 

You are Risk Manager (a Saarthi like Bhagwan Sri Krishna) of your client

In my last 35 years of association with investment industry I have observed that mutual fund distributors, investment advisors do not value themselves the way they should. My view is that they are playing the biggest role in the money management journey of their client.

To all of them I would say, “You are Saarthi like Bhagwaan Sri Krishna for your client (Arjun)”.

We all know Arjun had lots of queries, confusion in Mahabharat and how Sri Krishna resolved them and convinced Arjun through logical explanation to help him win the battle. Sri Krishna knew the overall situation, disturbing thoughts in the mind of Arjun then gave him practical solution which was advantageous and beneficial for Arjun. Once Arjun got to know who Sri Krishna was, all fear, all confusion, all negative thoughts got removed. His faith grew to boundless level on Sri Krishna. So the key here is FAITH/TRUST.

Now your role is similar and your own product is faith/trust. Many of you think your product is good service, great knowledge, correct guidance etc. Yes, they are but client will review all from his perspective. Relationship is built on not what you are but what you are perceived to be. This perception is created by experience and if that experience is of trust/faith then no one can replace you however other qualities one has.

All investors want no loss, safe return, good return and many times get confused, fearful and end up taking no decision, wrong decision w.r.t investment. Investment is all about risk management and not return management. Return is desire, outcome. That desire/outcome is fulfilled if risk is managed well. Risk is not dependent on return but return is dependent on risk. Return is a quantitative thing but risk is both quantitative and qualitative. Return is an easily understandable thing but to understand risk one has to put an effort.  Return is a unidimensional thing whereas risk is multidimensional thing.

Your role is in risk management. If you handle that well the desire result will come. In fact, you are playing a bigger role than fund manager in managing the risk of your client.

You are not managing only the risk of money of your client but risk of your client which is much more than money. When I am saying risk of the client it means keeping the focus on client’s needs/requirements of money in order to meet any of his financial goal you also have to see how notional loss (on paper) impacts him emotionally, how volatility is handled patiently, how different emotions of investors (greed, fear, temptation) is handled wisely, how a right balance is made between earning: expenditure: saving: investment. The important aspect linked to all 4 is consumption only. We earn for livelihood (consumption), we spend on consumption, we save and invest for future consumption. Consumption activity is throughout life and money plays a big role. Your role of money management of client throughout this life journey is based on all types of risk management.

I compared your role as Sri Krishna which I meant life is a journey (battlefield like Mahabharat), money is like (arrows), when, how and why to use money (spending, investment) is like which approach, strategy to use against which warrier in battlefield. Just like Sri Krishna you also have to play same role.    

Your 1^st role is to win the mind share/ heart share of your client. Understand your client first. Understand how much his money means to him from emotional and usage point of you.

Since no one wants loss. Start from 1 day to 1 month to 1 year to 3 years to 5 years……. A clear investment plan through which asset ensuring no loss whenever he wants and how liquidity will be met in case he wants money. We all know which part of economic cycle (expansion. slowdown, recession), market phase (bullish, bearish; interest rate movement, long term vs short term trend of interest rate etc) impact adversely to which asset, and generally till what time these adverse impacts last (based on past data).  Tell him to ask any negative question if he has in his mind. Even if he is not asking any negative question, you visualise that. For every negative situation/query you should have a positive answer. Don’t talk about product in this stage but win his mind share/heart share through logical reasoning and explanation.

Then think of investment product. In it apply simple rule client should get his money easily and comfortably with a safe growth (safety + growth) whenever he needs. Safe growth has be looked keeping asset features, characteristics in mind, saving from adverse/negative market and economic factors. Have a clear, well documented plan in place why a asset preferred or avoided with respect to time ( short term, mid term and long term),  keeping adverse impact of economic and market factors which action will be taken to protect and ensure safe growth. Once you discuss and convince your client and follow also in toto, trust will automatically develop as you have managed the risk.

Be a trustworthy saarthi to your client throughout his journey of life, help him to win all battles: emotion, money, priortisation of financial goals etc. and ensure just like Arjun won the battle and ended as winner, your client also crossing all hurdles (market cycles, economic cycles) and never face financial problem.

 

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