Should You Book Partial Profit Now?

The market tableau is replete with telltale signs, marked by numerous micro-cap and Small-Cap stocks that exhibit an exorbitance that seemingly outpaces their foundational underpinnings. Given this scenario, Bhavya Rathod discusses the merits and demerits of booking partial profit 
 

In its Monetary Policy Committee (MPC) meeting of the current fiscal year (FY24), the Reserve Bank of India (RBI) maintained the status quo on the repo rate, holding it steady at 6.5 per cent, alongside a series of consequential determinations. However, the central bank voiced apprehensions pertaining to the inflation landscape, triggered by the erratic monsoon patterns that have emerged in certain regions of the nation. In the aftermath of the RBI’s decisions, the benchmark indices responded with notable shifts. The central bank’s move to implement an incremental 10 per cent cash reserve ratio (CRR) on NDTL to absorb excess liquidity within the banking system – a reaction to the withdrawal of ₹ 2,000 currency notes – left discernible ripples across financial indicators. 

The augmentation of the CRR is poised to exert a measured influence over the longer term, with its impact anticipated to be particularly subdued on the majority of banks. Notably, the banking sector is poised to uphold its resilience, buoyed by robust asset quality, robust credit expansion, and formidable capitalisation. On a parallel note, the performance of foreign portfolio investors (FPIs) on Dalal Street during the month of August has exhibited marked restraint, diverging significantly from the robust inflows witnessed over the preceding three months. A granular analysis of FPI activity reveals purchases amounting to ₹ 3,272 crore in Indian equities, with an overall infusion totalling ₹ 6,241 crore by August 11, 2023. 

In contrast, the same interval has witnessed FPIs divesting Indian stocks to the tune of ₹ 7,543 crore, as per insights provided by the National Securities Depository Ltd (NSDL) data and confirmed by market analysts. An observation has come to light regarding the Indian markets, which experienced a phase of correction, attributed primarily to profit booking undertaken by major private banks and divestment activities carried out by foreign institutional investors (FIIs). What adds a layer of intrigue is the contrasting performance exhibited by the Mid-Cap and small-cap markets during this same interval. An interesting facet emerges as FIIs have consistently engaged in selling, thus intensifying scrutiny over their forthcoming actions, given their potential to wield influence over the overarching trajectory of the headline indices. 

Meanwhile, the global markets encountered fluctuations propelled by several factors, including the palpable impact of soft indicators such as the contraction in Chinese exports and the downgrade of credit ratings assigned to small and midsized banks within the United States. However, juxtaposing this turbulence, the US dollar surged against its major global counterparts over the preceding week, a response that unfolded on the heels of stable inflation indicators within the United States. The month prior saw a measured escalation in US’ consumer prices, a development that engendered optimism regarding the likelihood of the US Federal Reserve opting to retain interest rates at a consistent level in the approaching month. 

Capital is currently flowing from both domestic and international investors, demonstrating an assertive drive in their engagement within the secondary market, even as sellers exhibit a degree of reluctance in their disposition. In contrast, the primary markets have experienced a relatively subdued environment in terms of significant transactions, although a discernible resurgence has emerged in recent periods, marked by the anticipation of over three dozen Initial Public Offerings (IPOs) on the horizon. As the secondary market landscape unfolds, the disposition of assets has been predominantly orchestrated by promoters and entities affiliated with private equity and venture capital funds. This influx of robust fund activity has propelled valuations to a level that surpasses what could be considered their equitable value. 

Quandary of Profit Booking

The fluctuations and changes in the movement of financial flows and sentiments are unpredictable and can swiftly shift, unless supported by the stable foundation of core principles. In this realm, India finds itself favourably positioned, with its fundamental underpinnings tracing a robust trajectory. The Indian economy stands poised on solid ground, primed to ascend to the ranks of the world’s third-largest economy in the forthcoming years. This propulsion is artfully guided by the entrepreneurial prowess of India’s visionaries, harmoniously orchestrated by governmental stewardship and regulatory oversight. 

The resultant momentum engenders amplification in earnings’ growth for India Inc., as it forges global-scale enterprises that transcend geographical boundaries. Yet, as we calibrate this narrative, it is imperative to remain attuned to discerning indicators that punctuate the landscape. These cautionary signals beckon us to wield vigilance, for within the ebullience lurk subtle red flags demanding our unwavering attention. The market tableau is replete with telltale signs, marked by numerous micro-cap and small-cap stocks that exhibit an exorbitance that seemingly outpaces their foundational underpinnings. 

Many of these entities, perched above the realm of Large-Cap stock valuations, paint a portrait that may not be sustainable in the long term. An impending reckoning awaits, underscoring the ephemeral nature of such exuberance. An intriguing development within this milieu is the emergence of companies appending AI (artificial intelligence) suffixes to their nomenclature. In navigating these waters, it is incumbent upon investors to remain circumspect, cognisant of the boundaries delineated by prudence. Just as the mythic Laxman-Rekha demarcated a boundary not to be transgressed, investors must traverse with measured steps, cognisant of the broader implications that such trends may entail. 

Now is an opportune juncture to adopt the stance of a steadfast long-term investor. It is prudent to establish a balanced position that is attuned to your risk tolerance and investment objectives within the realm of equity as an asset class. While maintaining an overall equilibrium, consider harbouring a slight inclination towards favouring a large-cap portfolio. The wisdom of reserving a portion of your resources as ‘dry powder’ – readily accessible cash reserves or easily liquidated stocks – comes to the fore, offering strategic advantage during periods of market correction, especially considering the prevailing conditions where market levels exceed historical averages. 

In navigating these currents, it is advisable to maintain a steadfast allegiance to quality enterprises. The present climate does not bode well for those inclined toward momentum trading. Likewise, this is an era that does not encourage the pursuit of leveraged trading positions unless the investor possesses a mastery of adeptly managing stop losses. For the ordinary investor, an orchestrated systematic investment plan (SIP) emerges as the optimal conduit through which to participate in India’s unfolding growth narrative. This methodology offers a structured and steady pathway, effectively harnessing the potency of India’s economic voyage. 

In instances where an investor might harbour reservations about their capacity or discipline to intricately manage asset allocation, recourse to the proficiency of professionals via asset allocation funds can prove invaluable. These funds typically traverse the spectrum of debt, equity and gold, deftly constructing diversified portfolios. As the curtain rises on the upcoming years, the Indian equity markets are poised to unfurl a captivating rollercoaster ride, characterised by its distinct ebbs and flows. While embarking on this journey, ensconce yourself in a posture of relaxation and anticipation. If you have taken the precautions to secure an appropriate safety belt and pledge to refrain from impulsive interjections along the course, the culmination of this expedition promises a sense of profound contentment and satisfaction. 

Reasons for Booking Partial Profits 

In the world of stock markets, the norm is not stability but rather volatility and unpredictability. The essence of risk is deeply ingrained within the fabric of stock market transactions. Within this arena, market fluctuations occur without excessive fanfare, with stocks oscillating between peaks and troughs, often catching even the most astute analysts off-guard. The transition of stocks from positions of value or blue-chip status to Penny Stocks, or their unfortunate demise, further underscores this mercurial nature. In response, a prudent strategy for active investors involves a logical and intermittent practice of profit booking. 

This approach safeguards against complacency and unwarranted attachments to holdings. However, extending the tenure of stock ownership without judicious and occasional profit booking undermines the very essence of engaging in stock market activities. This prolonged approach might serve as a deterrent, particularly for those aiming to sustain their active participation. As the adage goes, delaying profit is tantamount to denying it. Investors enter the stock market arena with the aspiration of securing supplementary income for the betterment and prosperity of their families, with a keen focus on fortifying the financial future of their children. 

Postponing the act of profit booking over extended periods might inadvertently dampen this enthusiasm. The act of foregoing intermittent profit booking can transform an investment into a passive endeavour, rendering one susceptible to shocks and upheavals within the equities market, potentially leading to substantial financial losses. Viewed through a discerning lens, profit booking emerges as a nuanced art form rooted in astute judgment and timely execution. When carried out with care and precision, this practice instils renewed vigour and bolsters confidence. 

Yet, the pivotal quandary remains: when should one embark upon the act of profit booking? Despite this question’s monumental weight, there exists no singular rule or categorical answer. The sentiment voiced by market stalwart Rakesh Jhunjunwala succinctly captures this sentiment, asserting that within the realm of the stock market, the only steadfast rule is that there are no steadfast rules. The dynamic nature of the market finds its essence in the ever-evolving circumstances and environments. This intrinsic fluidity renders the stock market subject to the interpretive power of judgment, a faculty that varies inherently from individual to individual. 

Reasons for Avoiding Partial Profit Booking 

Doubts appear to have cast a shadow over the ongoing rally, primarily attributed to the elevated valuations of small-cap and mid-cap stocks. Nonetheless, a portion of the outcomes yielded by this surge have been remarkably impressive. The current stream of news and updates also maintains a robust momentum. Contrary to an atmosphere of euphoria, the prevailing sentiment indicates that we inhabit a bullish market landscape. The outcomes serve as compelling evidence, spotlighting several companies situated at the nascent stages of their growth trajectory. A case in point is the railway and defence sectors, along with various players within the infrastructure domain. 

Among these, certain public sector banks have emerged as standout performers, showcasing robust performance levels. The prevailing rally finds its impetus within an atmosphere of resoundingly positive sentiments directed towards India. Positioned as an oasis amidst the global financial landscape, India stakes its claim as the fastest-growing major economy on a worldwide scale. Noteworthy is its ability to maintain inflation levels within the stipulated target range established by the Reserve Bank of India (RBI) even in the face of pronounced spikes, as witnessed in tomato prices. 

Among a select few major economies, India stands out by boasting positive real interest rates, an accolade that bolsters its economic stability. Highlighting its fiscal robustness, India’s foreign exchange (FX) reserves rank fourth globally, exceeding its net FX debt obligations. Further strengthening its economic posture, India has exercised prudent control over its trade and fiscal deficits. The thrust of this economic trajectory has been amplified by a surge in government-led investment initiatives. This palpable uptick reflects a strategic commitment to catalyse growth through astute fiscal policies. 

Integral to this panorama is the remarkable stability characterising the Indian rupee, a currency distinguished by its resistance to volatility within the global currency spectrum. As evidenced by its ascent from the tenth-largest economy in 2014 to the fifth-largest in 2022, India’s metamorphosis is an exemplar of its tenacious journey toward scaling economic summits. With this momentum as a backdrop, the trajectory is poised to elevate India to the esteemed position of the thirdlargest economy within the imminent years. Given the prevailing optimism enveloping India’s growth potential, it certainly appears wise to adopt a long-term investment stance aligned with India’s burgeoning narrative of growth.