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Avoid The Risks, Book The Gains

The new investment mantra for the mutual fund industry looks to empower the investor

With the mutual fund industry maturing over the years, the various asset management companies (AMCs) have started launching new features that give investors a wide variety of options that can be used to maximize gains from their investments as well as lower the risks they face, and the most common of these nowadays, is the so-called trigger facility.

Under the automatic trigger facility, which can be based upon stock market index levels or percentage change in the net asset value (NAV) of the scheme, the money can be switched to another scheme of the same fund house. In other words, it is investing based upon a pre-defined goal, and then automating the process of entering the equity markets or booking gains and reducing chances of a loss.

The trigger facility works in two ways -- automatic transfers from a debt scheme to an equity scheme, or from an equity scheme to a debt scheme. In case of the former, entry into equity scheme is usually based upon the market index levels. So, an investor can decide the index levels, say of Sensex or Nifty, when he wants to enter the markets.

When transfers are made from an equity scheme to a debt scheme, the triggers can be based upon either the change in fund NAV, or the index levels, or even a particular date. The transfer can be of either the appreciation part of the investment or of the complete amount in one, or more than one, installment/s. What this means is that investors can take a part of their investment out, when their investment hits a point where their predefined goals are met and they are not willing to take any more risk by staying in equity.

This helps investors prevent losses in two ways. For example, when an equity-related investment reaches a pre-determined level, then the appreciation, or a part or the whole of the investment can be transferred to a debt scheme which is safer as compared to the equity scheme. On the other hand, if the equity investment falls, then at a predefined point, the automated trigger gets activated which transfers the investments to a debt scheme thereby ensuring the investments don’t lose their worth beyond a certain point.

For an inactive investor, this automated profit-booking facility is a good mechanism to follow. In fact, in the market downfall from the beginning of 2008, when a lot of investors felt that they were not able to protect their gains, this could have proved to be a very successful way of investing.

Among the fund houses offering trigger facilities are HDFC MF, Birla Sun Life MF, ICICI Prudential MF, IDFC MF, Reliance MF and Edelweiss MF. Birla Sun Life MF has introduced this facility in its Frontline Equity Fund. HDFC had earlier come up with HDFC Flexindex Plan for investors under its debt schemes wherein investors can choose different levels of the BSE Sensex at which the trigger will be activated and investments in the debt scheme will be switched to a predefined equity scheme. IDFC has introduced its trigger facility by way of an additional sub-plan, Plan D in its Money Manager Fund – Treasury Plan. IDFC Money Manager – Treasury Plan is a debt scheme where the investor can predefine entry into an equity scheme and also an exit from the same on the BSE Sensex reaching a certain level.

While Birla Sun Life MF, IDFC MF and HDFC MF have launched the facility in their existing schemes, ICICI Prudential MF has launched a new equity fund, Target Returns Fund which has the automatic trigger option as its unique selling proposition (USP). The fund was able to strike a chord with investors and raised a hefty sum of Rs 800 crore. Two new funds whose new fund offers (NFOs) are currently open, Reliance Infrastructure Fund and Edelweiss Nifty Enhancer Fund also have a trigger facility as an in-built feature. Edelweiss Nifty Enhancer fund also provides triggers based upon a predetermined date and expiry day triggers.

Reliance MF is also planning to launch a new equity fund, Reliance Target Appreciation Fund on the lines of ICICI Prudential Target Returns Fund. The fund will be investing in the top 100 companies listed on the BSE based upon their market capitalization. The scheme will provide the trigger facility based upon the levels of BSE Sensex.

However, automated index level-governed investment behaviour is not really a new thing. An existing scheme from UTI Mutual Fund, UTI Variable Investment Scheme – Index Linked Plan launched in 2002 also offers the benefits of trigger facility, but in a different form. The investments are not shifted to another scheme upon activation of a trigger, but each time the default trigger gets activated, i.e. each time the BSE Sensex gains/loses 1,000 points, the fund’s debt allocation increases/decreases by a further 10 per cent. This works in a similar fashion as the trigger facility, but with one crucial difference, the freedom to determine the trigger facility is not available to investors.

A fact to note regarding the automatic trigger facility is the applicable load. In most cases, transfers will attract the usual entry and exit loads. This means that if the trigger is activated shortly after the date of investment, investors will have to bear the exit load applicable.

But the trigger facility can nonetheless be helpful in locking in the gains in a disciplined manner, without any extra effort from the investor himself.