BSE Sensex at 51K, Should I book Profit??

For the last couple of months many people are asking me few common questions like should we continue with our SIPs, should we make fresh investments or is this the right time to book profit and get out of the market?

Let’s try to understand these questions and find out some logical reply for them.

Since June’20 onwards market has shown one way upward journey due to which people are thinking to book profit as this rally may not last long and eventually will come down.

People who started investing through SIPs from 2016-2017 got good returns till 2018, but then all the gains vanished due to non-booking of that time profit. This time they do not want to repeat this mistake again. That’s why retail investors are forced to think whether I am investing in the right place or not?

The stock market will always be volatile because it is it’s nature, and no one can change it. But yes, we can manage it through SIP. When we are investing money through SIPs our investments are made every month/frequently and we capture the volatility of the market. Like in March-April’20 when the markets were down we had got more units at lower NAVs and now when the market is high we have got handsome gains in those units but the units purchase now are at higher NAVs. Historical data analysis has shown that SIPs which have continued 7-10 years period have almost 100% probability to give positive returns. So taking out the money is not the answer but to adjust our portfolio based on our needs is the appropriate way to tackle this volatile market.

Volatility is for Short Term

By investing systematically and for long term we get two specific benefits firstly the volatility gets averaged out over a longer duration. We can see the 5- Year BSE Sensex graph here which shows even after so much volatility the general trend of BSE Sensex is upwards.

Magic of Compounding

Compounding has magical impact on our portfolio. To understand it better let’s understand it by an example, If we invest Rs. 1000, assuming a 15% annual return it will be 4000 in 10 years but if we kept it for 30 years it will be 66,000. Yes it will be 66X in 30 years which shows the power of compounding.

The chart given above shows the impact of low return and time period makes a significant difference. For example if we invest in Fixed Deposits (which are giving 5% currently) the investment amount of Rs. 1000 will be only 2653 in 20 years which is 1/3^rd as compared to an asset class which gives 10%.

Answer lies not in the current market and the return we got till now but whether we have achieved the financial goal for which we are saving this money, if not then withdrawing the money will not help us to achieve it. If our goal is very nearby then we can shift the money from more volatile Asset Class like equities/Aggressive Hybrid funds to lower risky investments such as ultra-short duration debt funds or conservative hybrid funds.

So before stopping our investment or booking profit, we should ask ourselves that had we achieved the financial goal/dream for which we have started this investment, If not then have faith in yourselves and continue, because by booking profit in investments we are not just booking profit but leaving our dreams, would anyone like to do this???