In a volatile market, incorporating a profit booking strategy to a plan becomes an essential part of investing. Profit booking is a process by which investors liquidate their holdings in order to cash out the profits that they have earned from their investments. It also allows investors to create real wealth from notional wealth that is generated by the rise in the price of their investments. It is important to remember that for profit booking, there must necessarily be a profit that one reaps. 

What are some strategies for profit booking?

In general, there are two core strategies when it comes to profit booking. The one that an investor should choose will depend on the specifics of the financial plan. 

1. Asset allocation / Rebalancing portfolio approach: In this method, the weights/allocation of an investment in different assets are calculated and constantly rebalanced to reap profits by moving from one asset class to another. This allows to maintain a proper risk adjusted investment portfolio. Let us say for example if an investor invests INR 50,000 in equity and INR 50,000 in debt instruments. Suppose the value of the equity investment appreciates to INR 75,000, then the portfolio will have additional allocation towards equity, when compared to your original ratio of 50-50. In this case, an investor will book some of the profits in equity and move it into another asset class to reinstate the original proportion and ensure that the portfolio does not overemphasize on one or more asset categories and the portfolio remains at a comfortable level of risk.
2. Goal / Target oriented profit booking model: As the name suggests, profits are booked in accordance with a predetermined target. An investor decides to cash-out the profits, if targeted returns are achieved in the scheduled time horizon. For example, an investor invests INR 10,000 in a stock and sets a target of 20% return within a year. He will book the profits as soon as the target returns reach at 20%. He will cash out the profits and invest in some other instrument. A good tip to remember while using this approach would be to work with a stop loss to ensure that the principal investment is not affected in the event of market crash or volatility. Similarly, if an investor wants to extend the time horizon or make changes in the targeted return, then using a trailing stop loss will be ideal. 

When should I think about booking profits?
You should consider profit booking when the stocks in your portfolio are being overvalued. In many cases when there is positive news that comes out about a company or a sector, it causes an excessive buying of stock from that company or sector among investors. This causes prices to rise, and profit booking allows you to make the most of such situations. Apart from this, when you are investing for the long-term you can make use of the rebalancing approach and book profits at regular intervals to mitigate risks.

Irrespective of when you think about profit booking, always work with a professional financial advisor before deciding what strategy may be right for you, and how to go about executing it. Consult a certified and experienced financial planner who can assist you in making the right decisions with respect to your portfolio and temperament as an investor.