Trigger funds have the trigger facility built in. It allows you to define a specific event, which may be related to time or value, in advance and when this event takes place, the trigger is activated. A recent offering of this type was the closed-end equity fund from Union KBC AMC. This fund will be wound up as soon as the NAV of the fund rises by 30% or upon completion of three years. Baroda Pioneer will launch a similar fund soon where the fund will hit the trigger when it rises 50% or after three years.
The above funds define their triggers. Diversified-equity funds also offer this facility. Here you can set triggers according to your liking. In ICICI Prudential MF's schemes, for instance, you can put your money in a debt fund and have it invested in an equity fund when the Sensex falls to a certain level or the fund's NAV declines by a certain percentage. Similarly, you can set a variety of options for redeeming or switching from equity funds when the market rises.
The short comings
Trigger funds don't operate based on valuation parameters. When equities go up, you should book profits only if valuations have turned expensive. Just because the Sensex has gone up by 25 or 30% or touched a certain level does not mean that you should exit equities. What if the outlook for equities remains positive and valuations have not yet turned exorbitant? In that case, you would lose out on further gains by moving out.
These funds also don't allow you the flexibility to delay booking profits and escape paying short-term capital gains tax. Imagine a situation where your trigger fund hits its target of 30% gain in less than a year. The trigger gets activated, gains get booked, and you are forced to pay tax on short-term capital gains. If you had not chosen the trigger option, you could have delayed booking profits by three months.
When you use the trigger facility you may have to repeatedly set triggers. Multi-asset funds and hybrid funds are more convenient for maintaining a particular level of asset allocation in your portfolio.
What should you do?
If you decide to use the trigger facility, keep a couple of points in mind. Avoid setting the trigger too low. By setting your return expectations just above the returns from fixed-income instruments, you may miss out on a good part of the high gains that equities are capable of delivering over the long term.
Also, keep in mind the tax implications and exit loads when setting triggers. Try to avoid paying both.
Finally, disciplined investors should rebalance their portfolios themselves. Only those who habitually ignore rebalancing should opt for the trigger facility.
1.ICICI Prudential Tax Plan
2.Reliance Tax Saver (ELSS) Fund
3.HDFC TaxSaver
4.DSP BlackRock Tax Saver Fund
5.Religare Tax Plan
6.Franklin India TaxShield
7.Canara Robeco Equity Tax Saver
8.IDFC Tax Advantage (ELSS) Fund
9.Axis Tax Saver Fund
10.BNP Paribas Long Term Equity Fund
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