My strategy is that, if the stock is overvalued, then book the profit and pay LTCG tax as required. Even if an investor holds MF units of large cap index fund and sell those for specific financial goals, you need to pay LTCG tax.
This strategy also helps me to do automatic asset balancing. If few stocks become overvalued in financial year and if I book profits, I can shift some funds to Debt (FD, RD, Debt Fund etc.) for few financial goals, since my Direct Equity Portfolio is allocated to few financial goals. I do not have to do any thing to this asset balancing (equity & debt balancing) forcefully. There will be few years, when I may not sell any stock or book loss. For those years, there will be no LTCG tax to be paid.
Generally I do not re-invest dividends since I use those for monthly regular expenses, as per my requirement or use those for few recurring financial goals. Ideally, an investor should re-invest dividends so that compounding can happen. I have done that in the past.
These strategies will vary from an investor to investor, since every one may use Direct Equity for different purposes. One can remain invested in the stock for long term (> 10 years) as well if that is your requirement.
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