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Booked profits? Be careful about re-entering

October 19, 2010 10:02 IST

In the last six months, investors have consistently booked profits and taken out money from both the secondary market and mutual funds. Since April, Rs 14,624 crore has been redeemed from mutual funds and another Rs 4,838.92 crore (Rs 48.38 billion) from the equity market.

While booking profits is one side of the story, the second is what to do with this sudden surplus in bank accounts?

"If an investor has exited the market at the 20,000 level, it is not prudent to re-enter at the same level. It is best to wait for a correction to consider equity exposure again," says Hemant Rustagi, CEO, Wiseinvest Advisors.

Most financial planners feel the same. Investors should stay away from the secondary market, at least for the time being. For those contemplating a re-entry, here are a few options they could consider, and a few they should best skip at the moment.

Secondary market

The most common advice for retail investors, even under normal circumstances, is to keep away from direct stock investment. In this market, too, the advice stays. Rather, it gets more pronounced.

"At present, the market is neither cheap nor overvalued. Many stocks have already crossed their previous peaks and are becoming expensive. There is higher probability of picking wrong stocks and incurring losses in this market," says Nirav Panchmatia, founder CEO, AUM Financial Advisors.

Initial public offerings

The market has seen a spurt in initial public offerings (IPOs) in the past few months, with 11 listings in 13 days this month alone. Most of these closed well above their listing prices on the first day. But some have slipped slightly.

For instance, Career Point Infosystems, which listed at Rs 461, ended its first day on the Bombay Stock Exchange at Rs 632. But in merely six trading sessions, the price came down to Rs 528.

Typically, financial planners are not too happy with IPOs. These companies do not have much historical evidence of performance. But data show that in recent times, retail investors have started participating in IPOs. It is important to look at the pricing and the company. Take advice from professionals.

Mutual funds

These are probably the best bet if you invest in a staggered way. "The lump sum received on redemption can be invested in a short-term income fund temporarily, earning seven-eight per cent annually. You can then take a systematic transfer plan to move your funds from these schemes to equity-diversified mutual funds with a bias towards largecaps. Further, the transfers can be staggered over six months to a year. Hence, you can enter the market at different levels," says Sriram Venkatasubramanium, head, wealth management, FCH Centrum Wealth Managers.

It is best to pick both the funds from the same fund house, as exit load is waived for transfers within the same fund house. While picking mutual funds, avoid ones with midcap and smallcap exposure because if there is a correction, stocks in these segments will see a sharper correction than the largecaps.

You can also consider fixed maturity plans to temporarily park your funds if you are awaiting a correction to enter at lower levels and are willing to block your funds for a period.

Gold

If your asset allocation excludes gold, it may be a good time to rectify this. You can invest five-10 per cent of your total portfolio in gold. You can look at exchange-traded funds (ETFs) instead of physical gold for greater liquidity.

The high prices of gold should not deter you, as Panchmatia explains, "Gold investments should not be looked at from a return perspective. Instead, include gold in your portfolio to protect yourself against a sharp correction in a rising market scenario."

It is not possible to invest in ETFs via a systematic investment plan. You will have to invest regularly in these funds.

On an off chance, if you haven't booked profits yet or continue to hold your mutual fund investments, you can heed the financial expert's advice. And, take this opportunity to re-balance your portfolio instead.

Masoom Gupte in Mumbai
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