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Getting Return Specific

It seems mutual funds are promoting the idea of automatic profit booking by way of introducing trigger facilities

Over the past two years, target-based investing has caught the fancy of fund houses. This is a mechanism whereby investors can invest in to achieve a predetermined target value or percentage return. Once that is reached, investors can pull out their investments fully or at least the gains on the achievement of that particular target. So if all goes well, investors should be regularly booking profits.

DSP BlackRock Mutual Fund is the latest to join the numbers of those who have launched trigger or target return facilities. It has introduced a target savings account service for its investors. The service is a variant of the trigger facility provided by the other fund houses. Under this, the investor has to give the fund house a target value which s/he wants to achieve while investing in the fund. The fund house will inform the investor through email or SMS when the investment achieves 90 per cent of the target amount.

The investor (existing as well as new) can opt to redeem the sum or switch to a debt scheme of the fund house. Under the default option, if the investor fails to specify the name of the debt scheme, the fund house will transfer the money into DSPBR Money Manager Fund.

Target based investing is relatively new in India. The first fund to launch such a facility was ICICI Prudential Mutual Fund - ICICI Prudential Target Returns in May 2009. The fund provided its investors a facility under which the investments or gains from the fund were transferred to the liquid fund or redeemed if a predefined target percentage was achieved.

Furthermore, ICICI Prudential Target Returns also introduced an entry level trigger, under which one can plan an investment in the fund. The investor can apply for trigger that will be based on the percentage loss in the net asset value (NAV) of ICICI Prudential Target Returns or drop in the value of the Sensex. The investments will be switched from the debt schemes of the fund to ICICI Prudential Target Returns.

Soon other fund houses joined in. Tata Equity PE Fund came up with an additional dividend trigger plan where the fund will declare dividends whenever the NAV appreciates by 5 or 10 per cent over the base NAV, subject to the limit of once in a quarter. A number of fund houses now offer such a facility under all their schemes - UTI Mutual Fund, Principal Mutual Fund and Edelweiss Mutual Fund.

Bharti AXA came out with a Liq-uity facility. Under this option an investor can transfer the daily gains earned by the liquid fund and Treasury Advantage to the equity fund of the fund house.

Although these trigger facilities have certain advantages (See Explaining Triggers) and help investors with goal-based investing, this could also result in the reduction of assets of the mutual fund. We have seen that happen in ICICI Prudential Target Returns. The launch timing of the fund was perfect - May 2009, soon after the start of the market rally in March. It delivered handsome gains and within around six months, the fund was able to meet the 20 per cent return target. Investors naturally pulled out their money as soon as their targets were achieved and the unit capital of the fund was reduced from 566 crore in September 2009 to 153 crore in March 2011.