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Booking Profits Made Easy


Booking profits regularly is crucial to protecting one’s returns. Here’s an innovative fund that will help investors do this automatically.

Objective
The fund seeks to generate capital appreciation by investing in companies constituting the BSE 100 index, which is also the benchmark for the fund. The fund will follow a bottom-up approach where the companies will be selected on the basis of their financial strength, proven business model, competitive edge, market share, asset base and valuations. The fund manager will try to outperform the benchmark index by superior selection of stocks within the defined set. In pursuance of the belief that investing is best done in a disciplined manner, the fund offers NAV appreciation based triggers---at 12 per cent, 20 per cent, 50 per cent and 100 per cent---whereby either the appreciation or the entire investment can be shifted to one of the predetermined debt schemes: ICICI Prudential Liquid Plan, ICICI Prudential Floating Rate Plan, ICICI Prudential Short Term and ICICI Prudential Income Plan.

Fund Manager
Mr. Sanjay Parekh shall be the fund manager for the fund. He is a Chartered Accountant and has over 14 years of experience in the equity markets, six of them in fund management. He is also the fund manager for ICICI Prudential Power Fund and ICICI Prudential Fusion Fund - Series II.

Fund Family
ICICI Prudential Asset Management Company started its operations in August 1993 and reached the number two position within five years. It has been following a path of aggressive growth and is currently has Rs. 51,500 Crore in its assets under management (AUM), third largest in the industry according to the monthly average AUM data for March 2009 from AMFI. It currently has 20 equity funds; seven of them are rated 5-star by Value Research, which is the most for any company. It also has 15 funds rated 4- and 5-star, next only to Birla Sun Life Mutual Fund.

Suitability & Recommendation
By itself, this fund is a normal large-cap fund that is likely to be run with the same competent conservatism that ICICI Pru’s equity funds generally are. However, it incorporates a useful innovation in the form of an automatic trigger option. This trigger option allows investors to automatically book profits in a systematic manner. The profits are booked by redeeming gains from this fund and switching them to an income fund run by ICICI Pru. This switch is carried out automatically based on a trigger level chosen by the investor. The choice is between trigger points at 10, 12, 20, 50 and 100 per cent. Every time the fund has gained this much from the beginning, or from the previous triggering, all the gains are switched to one of the four fixed-income funds available above. In this manner, the money that is already earned is safe from the vagaries of equity. The different trigger percentages are intended to provide different levels of conservatism. In theory, the lower the trigger percentage you choose, the less you will be exposed to the risks and rewards of equity.

Can such a mechanism actually be helpful? A simulation conducted by Value Research suggests that indeed it can be. Our simulation assumed that Rs 1 lakh were invested in a fund based on the BSE100 in January 2005 and a trigger of 12 percent was selected. Every time 12 per cent returns were made, the profits were switched to ICICI Prudential Income Fund. We found that the of the initial Rs 1 lakh invested in the equity fund, only Rs 51,000 remained as the crash took its toll. However, the gains shifted to the income funds were now worth Rs 1.55 lakh, giving a total value of Rs 2.06 lakh. Had the money stayed in the equity fund, it would have been worth Rs 1.51 lakh. Of course, from this point on, the trigger option would not activate till the value reaches Rs 1.12 lakh but that is the way it should be.

It’s clear that such triggers are a good way of booking profits. Of course, since there’s nothing special about the triggering mechanism that is particular to this fund. Such facilities should be introduced into all funds in a routine manner.

Basic Details
Type: Closed-End Diversified Equity Fund
NFO Opens: April 15, 2009
NFO Closes: May 14, 2009
Minimum Application Amount:
Retail Plan: Rs. 5,000/-
Institutional Plan - I: Rs. 100,000/-
Minimum SIP Investment: Rs. 1,000/-
Plans: Retail Plan with Growth and Dividend (Payout & Reinvestment) options, Institutional Plan-I
Fund Managers: Mr. Sanjay Parekh
Benchmark: BSE 100
Load Structure:
Entry Load: For investment below Rs. 2 Crore and all SIP / STP, 2.25 per cent.
Exit Load: For investments of less than Rs. 2 Crore, 1.5% if invested for less than 6 months or 1% if invested for 6 months or more but less than 12 months. For SIP, 1.5% if redeemed within 1 year and 1% if redeemed after 1 year but within 2 years. For STP, 1% if redeemed before 12 months.
(No entry / exit load is chargeable under Institutional Plan-I.)
Annual Recurring Expense (maximum): 2.50 percent (including 1.25 percent of Investment Management Fee).