Nifty 500 YTD returns for this year has turned into positive to 1.52% while writing this article. We have seen market falling down close 20% and then again recouping all the losses and turning into positive in 2016.

Few stocks have really had great run and now they are sitting very close to our selling price. There was always this one question that kept troubling me for the long time, should we always be fully invested in the stock market or keep some cash in the portfolio?

Many investors and even professionals think it is always better to stay fully invested, but working as a professional investor, practically I found myself not comfortable with that approach to always stay invested and let all of your money work for you.

It is the human bias towards focusing on the return on capital rather than return of capital, results in investors to focus on to stay invested fully in the market and disregard to the risk involved in achieving those returns. If you follow our model portfolio then you will notice that portfolio three had given maximum returns even after sitting almost 17% onto cash compare to other portfolios which are fully invested.

Over the long run, keeping some sensible cash in the portfolio makes sense, as it helps to deploy those cash in times of sell-off. If you are fully invested and you do not have extra cash to deploy, when market turmoil approaches you see your holdings falling down and you miss the opportunity to buy the beaten stocks. And this detracts your performance in the long run.

The same rule applies when the stocks start trading at crazy price and you do not sell them. As someone said that you had never made money from the stock market unless you sold. Our portfolio is already sitting on 30% cash and if the market keeps going up and stocks keep trading at crazy price, we won’t be surprised to see our portfolio sitting on cash almost 50%.

This always had happened with us when we approach very close to the peak cycle. Before you self-procrastinate that market is trading at peak and is expected to fall, remember we haven’t yet approached to our 50% cash (we are still at 30% today).

When individual stocks that we like become cheap, we deploy our cash. Conversely, when these stocks become expensive there is less opportunity for us to put capital to work and cash position builds up accordingly. We never relate or take insight from our cash holdings in our portfolio that market is trading at peak or will fall soon.

To subscribe to the mantra that one should be fully invested in the stock market in our view is imprudent, particularly in times when stock markets are running hot.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.