If we book profits in shares in a rising market, should we do the same in equity funds?
Nithya Menon, Trivandrum
As a concept, what you are stating is right. However, there are several studies that indicate that true wealth is created through mutual funds only if you allow your money to stay invested for a long time, say five years and 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 if applicable and the capital gains as applicable. Unlike investing in stocks, investing in mutual funds is meant to be in a manner that you do not have to make too many decisions on timing. Yes, exit an underperforming fund when the markets are rising, as this too may have gained, but stick to funds that are faring well and are progressing well towards the goal for which you invested in.
