Last week, we sold the below 2 stocks from our portfolio:

Exit Manappuram Finance @ Rs. 83.40 – Stock of the Month – Date of recommendation – 28 September 2015 @ Rs. 22.55), (Up 270%)

Exit Time Technoplast @ Rs. 80.60 – Multibagger Ideas – (Date of recommendation – 29 June 2016 @ Rs. 49.15), (Up 64 %)

One of the subscribers, who has been around on our site since 2013, had this to say:

Thank you. That leaves me Rs. 48,800/- spare, where do I invest this now?

It’s a happy moment when you make profits but what after profit booking? Should you buy more stocks, or invest some of this money in a fixed income instruments, or build a fixed asset, or spend it on personal consumption. The choices in each category are endless. The answer necessarily will depend upon an array of factors. For the purpose of this article, I take it that the subscriber intends to use money to make more money – Invest further!

Profit booking is done either when a stock has appreciated beyond its intrinsic value or when the overall markets become really expensive.

In either case, a prudent investor should take some fraction of the profit off the market, permanently or for the time being. At the very least, invest the percentage of profit in a fixed income product.

For those who totally believe in stock investing as much as we do here would perpetually want to invest in stocks.

Their philosophy: sell profitable stocks to buy more undervalued stocks and repeat the process.

Typically however, when you decide to book profits something somewhere has appreciated beyond its reasonable value. At such times, it is only wise to split what you realise between cash and stocks. Here’s a practical approach to follow after you sell your profitable stocks:

  1. Invest in Cash – Investing in cash (or sitting on cash as the phrase is commonly used in the market) does not mean that your money does not make any return. The intention here is to make the highest possible return that is RISK FREE. Some options to consider:
  • Saving BankThese days saving bank accounts pay up to 7% interest p.a.. The amount of interest you are eligible for is calculated based on your daily balance. The daily balance is the end of day closing balance in your account.
Top Saving Bank Account Interest Rate in India – (Annualized)
Bank Name Daily balance above Rs.10 lakhs Daily balance above Rs.1 lakh Daily balance below Rs.1 lakh
RBL Bank 7.1%
6.1%
5.1%
Yes Bank 6%
6%
6%
Kotak Bank 6 %
6 %
5 %
IndusInd Bank 6 % 5 % 4 %
Bandhan Bank 5 % 5 % 4.25%
HDFC Bank 4%  (applies for all amounts)
Axis Bank 4%  (applies for all amounts)

Note: Technically it is possible to use the money all day and to transfer it back into your savings bank account before end of day to earn up to 7% interest (in addition to what you do with the money before transferring it back).

  • Liquid Mutual Funds: There are a variety of liquid / money management funds that earn between 7.1%-9.2% interest annually. You can buy these with your spare cash. Settlement happens typically on T+2 basis. You will get margin limits against your investment in these funds. Unlike all other categories of mutual funds, there is no entry/ exit loads of investing in these funds. Examples – IDFC Money manager funds, DSP BlackRock Money Manger Fund.
  • Liquid Bees: GS Liquid BeEs work very much like a liquid mutual fund. Investment is made in short term money market instruments to earn fixed income type returns. The big difference here is that this product is available within the Capital Market (CM) segment of the trading terminal.

This means that clients do not have to withdraw the cash out of their trading accounts and can earn a fixed income return in their trading window itself.

This is particularly helpful for small money managers who do not offer PMS Service but manage client funds in their respective accounts. They would naturally like to avoid the hassle of sending spare money back to the client and asking back for this money when they find viable investment options again. At the same time, they would like to invest and earn a decent return for the client instead of keeping spare cash which earns no money in the trading accounts.

Returns range between 6-7% annualized. The unit price of the Liquid Bee remains the same at Rs. 1,000, appreciation happens as the number of units held in the account keep increasing.

  1. Invest in Other Stocks – Depending upon how expensive are – (i) the overall markets (ii) the stock that you want to buy, in the same order, you may want to deploy some or all of your returns in other stocks.

Keep in mind: when you are investing in other stocks, your goal is to generate more than the RISK FREE rates mentioned above. If you think that is even remotely unlikely, then stick to option 1, particularly after profit booking. Give yourself at least 8 weeks before investing in more stocks. Markets will be around!