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While directly trading in equity i.e. bypassing mutual fund, a common strategy is to book a profit when market is up and accumulate when market is down.

Mutual funds buy and sell in bulk. But, does they follow same strategy? Does mutual funds sell (to book profit) when market is up?

I do not think so; my guess just. Because, then there will be an issue what to do with the balance money? Mutual funds just cannot hold the un-invested money. Hybrid funds may do this though.

My question is about both Equity funds and Hybrid (Equity + Debt) funds. I guess answer for these two will be different.

I am not asking about ETF, ELSS, Tax Saving etc.

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The Turnover Ratio is the percentage of holdings that are replaced in a given year. This varies by the type of mutual fund, its investment objective and the manager's investing style.

A stock index fund will have a low turnover rate since it attempts to duplicate the index's compsoition. A bond fund will have a higher turnover rate because bonds are of limited duration. Aggressive small cap funds tend to have a higher turnover than large cap value funds.

The turnover rate represents the percentage of holdings that have changed in the past year. The typical equity fund has a Turnover Ratio of 100% which means that it holds stocks for an average of one year. A 25% turnover means positions are held an for an average of 4 years.

As a random example, consider the T. Rowe Price Global Technology fund (PRGTX). It has a 3 year return of 23.45% with a Turnover Ratio of 171%. So yes, mutual funds book profits.

Rather than say that they book profits and distribute when the market is up and accumulate when it is down, I would offer that they cash in positions that in their estimation have become fully or over valued and reinvest those profits in under valued opportunities.

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  • On the other hand, a mutual fund could have zero turnover and a three-year return of 23.45% without "booking" any profits because it has not sold any securities: the share prices of its holdings just increased (a rising tide lifts all boats). In the US, mutual fund profits from the sale of securities are returned to the investors as capital gains on which the investor must pay (capital gains) tax, even if the investor chooses to reinvest the money into more shares of the mutual fund. This might be different in other countries (e.g.the land of the believers which Aastik might be asking about). – Dilip Sarwate Aug 15 '18 at 18:56
  • Re my random example, I think that it's logical to conclude that if a fund has a high turnover ratio and they also are performing well then they are booking gains - which is part of what the OP asked. – Bob Baerker Aug 15 '18 at 19:13
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Yes, regardless of what assets they trade in, whether debt or equity, they definitely book profits, or at least try to. If they didn't, nobody would invest in them. I suppose they could employ a buy and hold indefinitely strategy, but that would be unusual for a mutual fund.

As for capping their cash holdings: if they sell a position (increasing their cash holdings), they can use the funds to buy a different position (decreasing their cash holdings).

Usually, equity funds hold cash between 1% and 5% of a fund’s corpus, though some funds can hold as high as 7-10% of their corpuses in cash. Some funds prefer to hold larger portions of their portfolios in cash because their mandate allows them to hold high cash levels if—as per their analysis—good stocks are not available at desirable valuations. Few others like dynamic equity funds also hold higher cash if they feel equity markets are overheated. - Cash holding in mutual funds explained

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