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If you are not monitoring your portfolio regularly, a trigger option could be a useful tool

Trigger Option
Many mutual funds provide a trigger option in their schemes. What are these trigger options and is it better to invest in a fund offering this option?
- Pratap Bajwa

If you don't have enough time to monitor your portfolio, then a trigger option is what you need. This option is an easy way to determine your exit from a fund well in advance. Triggers are of three types: time-based, event-based and value-based. Time-based trigger will result in redemption at a pre-specified date. An event-based trigger will come into force when a particular event has taken place, say the Sensex crosses the 13,000 mark. The most useful trigger may be the value-based option. Here, when a fixed return has been achieved, units get redeemed automatically. Thus, a target of 20 per cent can be used as a trigger to exit an equity fund.

If you are not monitoring your portfolio regularly, a trigger option could be a useful tool to cash out your gains once the target is achieved. In the recent past, many fund houses have introduced this option for their equity schemes. But don't invest in a fund just because it has a trigger option. At the end of the day what matters is the return on your investment. A poorly-performing fund will not allow your trigger to materialize. So, make sure that the fund you plan to invest in has, apart from a trigger option, a good performance track record too. In addition, you should also ensure that the fund's investment objective is aligned with your financial goals. This will help avoid any unpleasant surprises.

Investment Horizon
I am a housewife and also a senior citizen. I have invested Rs 1 lakh in a short-term fund. How long should I hold on to this investment? That apart, I also intend to invest in an income fund. What time limit would you advise for this investment?
- Salma Khatoon

Following a two-pronged approach to debt investing is a sensible decision. While a short-term fund will take care of your immediate liquidity requirements, an income fund is meant for a longer term. The decision to stay invested should, therefore, be guided by your financial requirements and investment goals.

Before we move further, one needs to understand a few things. First and foremost, it is important that one realises the suitability of a particular fund before making any investment. Short-term funds serve the purpose well if one is looking at parking one's investible surplus for a period of three to six months. Investors stay committed to them for three reasons: liquidity, capital preservation and income. Since these funds invest only in shorter-maturity corporate bonds, government securities and money market instruments, they are less susceptible to interest rate changes and are less volatile. Therefore, they offer lower returns than an income fund, but higher returns than a cash fund.

Income funds too invest in corporate bonds and gilts, but in longer-maturity papers, which are more susceptible to interest rate movements. Since these longer-tenure papers - particularly gilts - are volatile in nature, income funds are more volatile than short-term funds. One should thus have a minimum investment horizon of over one year for an income fund. But remember that in the recent past, interest rates have been moving up and therefore, income funds have hit a rough patch as returns have been hard to come by. Given that uncertainty over interest rates can continue for long, do not expect huge returns from these funds.

Now that you have some idea about these funds, the first step should be to ascertain what your financial goals are and the time frame within which you wish to realise them. Different time horizons require different investment strategies. If you have an investment horizon of over one-year, then you should pick an income fund. As for your investment in a short-term fund, if you need money in the immediate future, then we suggest that you stay put.

Scheme Takeover
From time to time, we see a merger or a takeover in the mutual fund industry. Recently Birla Sun Life took over the schemes of Alliance Mutual Fund. What could be the impact of such developments on the net asset values of these schemes? What should an investor in these schemes do in such a situation?
- C Bijoy Philip

Mergers, takeovers, folding up operations etc are common to all industries and the mutual fund industry is no exception. News of closure or takeover is likely to cause investors some anxiety. But with market regulator SEBI ensuring high transparency and disclosure requirements, you need not panic about the closure or acquisition of your fund. Your money is not going to vanish all of a sudden.The structure of mutual funds, in the first place, ensures investor protection. A mutual fund is a trust where the trustees act as protector of unit-holders' interest. The trustees appoint the custodian to keep your investment in the form of securities. So the money you have invested is not with the asset management company (AMC), which only plays the role of managing your money professionally, but it is in the safe hands of the custodian. All funds have a compliance officer, who is appointed to ensure that funds are being managed according to regulations laid down.

A compliance officer has the right to supersede management and report to the securities watchdog in case of a problem.

Let us look at two situations. In the first case, a fund decides to terminate its operations and in the second, the fund sells a scheme to another fund. In the first case, the trustees have to give notice, explaining reason for winding up, to the board. The notice also has to be published in two national dailies and in a vernacular newspaper where the fund is formed. Hence, investors are always made aware of such developments. A merger or takeover of schemes represents a change in the fundamental attributes of a scheme. An asset management company has to take the permission of 75 per cent unitholders or allow them to redeem without any exit load.

So, what does one do under the situation? You need to find out more about the mutual fund that is buying the scheme. Also check out the past performance of similar schemes that it has managed and if it suits your risk-return profile.

If you feel that fund returns are a product of specific portfolio managers, find out if they will continue with the new entity. If this is the case, there would be greater chances that the past performance may be replicable. If you are, however, uncomfortable with the new management and its style of investing, you always have the option to redeem your investment and look for other suitable avenues.

Big & Small Funds
I plan to invest in mutual funds for the first time. Should I go for a big fund or a small fund?
- Rashmi George

No doubt, the size of a mutual fund is an indicator of its popularity among investors. However, this in any way does not reflect that a large fund will deliver better returns or a small fund will be a lousy performer. And returns are one of the most important things you would look for in a mutual fund or any other financial instrument. If we look at size in the context of equity funds, it can be said that smaller funds can be more agile. This is particularly true for funds that have an objective of investing in mid- and small-cap stocks, which also happen to be relatively less liquid. In case of such funds, a small size will enable the fund to easily buy and sell stocks.

But small size can also be a hindrance. Lack of sufficient assets may not allow a fund to achieve a greater level of diversification. In the case of index funds, size may be an asset. Any inflow can be easily invested without giving rise to significant tracking error. In the case of a small index fund, the same inflow may look substantial and it may not be easy to allocate it without causing a tracking error.

For debt funds, size becomes a critical factor because of the effect of expenses. Larger funds can distribute fixed expenses over a number of investors. This can bring down the expense ratio and thus reduce its impact on fund returns. Larger funds can also negotiate better rates with issuers of debt papers. In the case of all these observations there will be exceptions also. So size might have some role to play, but the more important things to look out for are the objective of the fund (whether it is a large-cap fund, a mid-cap fund, thematic fund or a sector fund) and its performance history (how consistently it has performed vis-à-vis its peers over the years). Particularly, in case of mid-cap funds though, size can have a role to play. Of the two well-performing mid-cap funds, it might be worthwhile to go for the one with lower asset size.

Why Take SIP?
Equity markets seem to be very unstable and I can never figure out the appropriate time as to when to invest. Can a systematic investment plan (SIP) help me? For how many months or quarters will I have to invest? Should I stop somewhere or should I just carry on until I redeem the units? Should I book profit above the average cost?
- Vikas Kumar

Investing in equity funds can often be a tough task. When markets move downwards, is it a good time to invest? Or will share prices fall further? When markets are high, how can it be determined if it will continue to reach higher levels or will it go down? In a volatile market the decision to invest or to hold back becomes even more difficult. Buy low, sell high, which is so easy in theory but actually very difficult in practice. A systematic investment plan option will solve this problem. Systematic investment plan is an investment programme that allows small amounts of money to be invested at regular intervals (monthly or quarterly). A pre-determined amount is automatically transferred from an investor's bank account and invested in the desired mutual fund. This investment can be done on a monthly or a quarterly basis.

With an SIP there is no need to worry about where markets are headed. Attempts to time the market can be avoided. Whether the market is rising, falling, or remain volatile, the ability to keep investing helps in reducing the average cost of investment.

So, instead of reducing risk by trying to time the market, risk is reduced by investing in trenches. While considering an SIP plan, it should also be remembered that this does not ensure profits or protection against a loss in a declining market. Investing through SIP is not a guarantee that your money is insulated from market fall. It does smoothen out the market ups and downs and reduce the risk of investing in a volatile market.

The number of years you should invest for depends on the amount of money you wish to deploy, and the time over which this amount will be deployed. Usually, mutual funds require at least six SIP installments with a minimum amount of Rs 500 or Rs 1,000 per installment to be invested. Your decision to exit from a scheme will depend on your time horizon of investment (which is linked to your goals and objectives). Irrespective of the method of investing (systematic investment or one-time), we suggest that you be prepared for an investment horizon of at least three to five years to make some reasonable gains.

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