How will you benefit from investing early in mutual funds?

Sensex, is sitting quite pretty at 52,000-points – an all-time high. Some foreign brokerages like Morgan Stanley are predicting new highs of 55,000.

Unfortunately, many retail and high net worth individuals in mutual funds don’t seem to be convinced. The result: They have turned sellers. The recent rally, as a result, is being largely driven by foreign institutional investors, with domestic institutional investors like mutual funds reeling under redemption pressure.

Sample this: According to data from Value Research, from August till January-end, retail investors were net sellers in equity funds for five out of the last six months. And it is a recent trend. In the past year, investors were net buyers of equity funds for seven months despite the bloodbath – when the Sensex fell below 26,000 level – in March last year. Yet investors kept their faith.

So, what has triggered this sell-off? Profit-booking by many investors because an-almost 100% turnaround in fortunes within seven months seems to make sense. Despite the 10% long- term capital gains tax (over Rs 1 lakh applicable for stocks or funds held for over one year), it may still make sense for some to sit on cash. Even if it is short-term gains (applicable for stocks or funds held for less than one year), a tax rate of 15% isn’t much of a deterrent.

Says financial planner Suresh Sadagopan: “Investors are selling because they can see the disconnect between the market and the real economy. Many believe that the rally may not last too long, and in case of a sharp correction, they may lose these profits. However, it is not a good strategy because we did not have any wisdom about the stock market’s direction in March 2020, and we are no wiser even now. Also, if someone is going to be invested in the stock market for the next 10-15 years, then there will be many new highs.”

According to him, one can sell in these situations:

• If some goals are coming up – children’s education, purchase of a property or others – a portion of the portfolio can be used to meet them
• If you are close to retirement, selling may make sense because the main objective is to preserve wealth
• If you want to rebalance the portfolio because the sharp increase in the equities would have increased its proportion with respect to debt

In case of rebalancing the portfolio without selling, there is another strategy: Say, you were investing Rs 1 lakh a month through systematic investment plans with 70% in equities and 30% in debt, reduce the equity portion to 60% or 50%. This will automatically reduce the equity allocation/increase the debt portion over time.

In other words, there is surely a temptation to book some profits. But a little restraint will help create more wealth in the future.