I book profits in shares in a rising market, should I do the same in equity funds?
Sita Lakshmi, Chennai
Conceptually, what you are saying is right. However, there is more than one study that proves that true wealth is created through mutual funds only if you allow your money to stay with the asset manager for a long time—at least five years, preferably more.
There are two simple arguments against moving in and out of mutual funds. The first is that there is a call on the stock market that you are making. Missing out on big moves because of an early exit can be a large cause of not wringing the most out of your units. There is a second, and more relevant, reason for not trading in and out of mutual funds, even if you are in the habit of doing so with stocks.
Unlike stocks, the transaction costs in mutual funds tend to be much higher. You will find that getting in and out of any equity fund costs – exit loads and tax on gains if you exit before one year of your investments. So if you ride a market and do that a couple of times, you will find very quickly that your actual gain is a lot less than what you perceive it to be. When investing in mutual funds, keep a time frame in mind and invest with a goal or sum that you wish to build over a specific period of time.
