"My equity mutual fund investments have grown to ₹25 lakh from my initial investment of ₹10 lakh. Shouldn't I book profits and reinvest the money in another mutual fund?"
This was a question posed by one of our clients during a review meeting.
The same question often arises when direct stock investments appreciate significantly.
The answer is both simple and complicated. Let me explain this from the perspective of how we approach investments at Naveen Rego Capital.
1. When you need the money
The primary purpose of any investment is to generate reasonable risk-adjusted returns over a chosen time horizon to fund a specific financial goal.
Therefore, investments, whether mutual funds or direct stocks, should be liquidated when the money is required for the intended goal. The investment strategy must be aligned with the goal's time horizon and risk profile.
2. When your investment has appreciated significantly
This is where things get interesting.
Before selling an investment simply because it has delivered handsome returns, ask yourself another question:
Where would I reinvest the proceeds?
If the future investment opportunity offers significantly superior risk-adjusted prospects, considering the investor's risk profile, reshuffling the portfolio may make sense.
Otherwise, exiting an investment purely because it has appreciated substantially is not necessarily a wise decision.
A good investment can continue to compound over time. Staying invested, where justified by its fundamentals and future prospects, could also be one of the more tax-efficient ways of building wealth.
3. When an investment becomes a disproportionately large part of your wealth
Portfolio diversification is not just about adding new investments. It is equally important to continuously monitor and manage the exposure to existing investments.
An investment strategy or product that performs exceptionally well can gradually occupy a disproportionately large share of one's wealth. This could expose the investor to excessive concentration risk.
At Naveen Rego Capital, we follow a principle that no single investment strategy should account for more than 10% of an individual's wealth. When an allocation exceeds this threshold, we evaluate and recommend appropriate rebalancing.
The objective is not to sell a winner but to ensure that one successful investment does not disproportionately influence the family's future financial outcomes.
Let's take a simple example.
Mr. Ram Prakash invested ₹10 lakh in a stock or mutual fund portfolio. Over time, its value appreciated to ₹25 lakh.
If he needs the money, he can liquidate the entire investment or only the portion required.
But what if he does not need the money and is merely contemplating a switch?
Here is an interesting exercise.
Mr. Ram Prakash should imagine that he has ₹25 lakh in cash today. Would he invest that entire amount in his existing portfolio, or would he choose something else?
This simple question helps eliminate historical bias — the tendency to hold on to an investment merely because it has served us well in the past.
A few important takeaways:
- Investment decisions should be driven by financial goals, fundamentals and future prospects, not merely past returns.
- Do not sell a good investment simply because it has appreciated significantly.
- Do not hold on to a poor investment merely because you are sitting on a loss. The opportunity cost could be substantial.
- Consider taxation and transaction costs before reshuffling your portfolio.
- Look at the quality of the underlying portfolio and its future growth prospects, not merely the mutual fund NAV or stock price.
Investment decisions should ideally be financial and mathematical. Unfortunately, they often become emotional.
Sometimes, the best investment decision is to do nothing and allow wealth to compound.
Remember, booking profits is not the same as creating wealth.
If confused, seek professional advice.
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Happy Financial Planning!
Naveen Julian Rego – CFP®
MD & Principal Officer
Naveen Rego Capital
SEBI Registered Investment Adviser
Reg No: INA000019211
BSE Enlistment No: 2178
Disclaimers:
- Investment in the securities market is subject to market risks. Read all related documents before investing.
- Registration granted by SEBI, enlistment as IA with Exchange, and certification from National Institute of Securities Market (NISM) in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.
- Financial products recommended by us that are under the jurisdiction of other regulators are beyond the scope of SEBI’s grievance redressal mechanism.
