Trigger-based plans enable investors to shift conveniently between debt and equity. The investor determines the Trigger and the portfolio gets rebalanced accordingly. Simple, specially if he wants to just sell his units or shift them to another scheme from the same fund house. The hindrance is if the investor wants to shift his investment to a scheme from a different Asset Management Company (AMC). So he may exit from an equity scheme from Fund House A but not want to put his money in a debt scheme in Fund House A, but rather, in Fund House B. The Trigger will just enable him to sell his units. He will have to make the effort to buy the units of the scheme from the other fund house.
Blame it on lack of understanding, dearth of awareness or distributor apathy, or all three. But Triggers, as a concept in the mutual fund industry, have certainly not caught the fancy of fund investors.
ICICI Prudential Target Returns Fund, a diversified equity fund with a Trigger facility, set the pace. More recently, Tata Equity PE Fund came up with an additional dividend trigger plan where the fund will declare dividends whenever the Net Asset Value (NAV) appreciates by 5 or 10 per cent over the base NAV, subject to the limit of once in a quarter. They are not alone. A number of fund houses now offer such a facility under all their schemes - UTI Mutual Fund, Principal Mutual Fund and Edelweiss Mutual Fund.
Here we explain this feature in detail to enable you to take a call on whether or not you should opt for it.
Understanding Triggers
Trigger is an event on the occurrence of which the fund will automatically redeem/switch the units on behalf of investors.
Once you invest in a fund, there are two basic transactions that you can execute; redeem your units or transfer them to another fund. When these transactions are automated based on an event taking place, it is referred to as a Trigger.
So once you decide on the Trigger, the execution of the transaction is automated.
Who sets the Trigger? The investor.
Who executes the Trigger? The fund house.
When is it executed? On the day the Trigger point has been reached, which is mostly value specified.
Let's say you bought 100 units of Fund A when the Net Asset Value (NAV) was Rs 12. You want to redeem all your units when the NAV touches Rs 15 (Trigger point). You can keep track of your investment on a daily basis and send a redemption request when that happens, or you set a Trigger. If you opt for the latter, the fund house will take over and track your investment and sell the units when the NAV touches Rs 15.
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When it works for you…
Automated: Investors need not track their investments or the market. It is conveniently taken care of.
Discipline: There is no emotion involved, which often works against the investor. If you get carried away with the stock market, a Trigger will help you stay disciplined.
Goal Based Investing: It helps you to stick to your goals of capital appreciation.
Loss Limitation: Since limits can be assigned to upside and downside movement of investment value, a market slide will not take away your gains.
When it works against you...
Disturbed Asset Allocation: If gains are regularly booked in equity investments as a bull run gains momentum, the portfolio may get skewed towards debt and restrict gains from a market rally.
Revisiting the Trigger: One cannot be totally disconnected from their investments. A lot of these Triggers cease to exist after being executed the first time. Investors may need to apply for another Trigger again. Alternatively, if the Trigger is not executed within a certain time, it may expire and would need to be re-activated.
Aimless Profit Booking: Profits may end up getting booked even if there is no goal in sight. Hence the money could remain un-utilised for years to come.
Load and Taxes: Redemptions could attract taxes. For instance, redemption in equity funds within one year of investment will attract capital gains tax. Not to mention exit loads if the tenure of the investment is brief.
Can it work profitably?
Investment Amount: Rs 1 lakh
Investment Date: January 1, 2006
Investment Vehicle: Sensex-tracking fund
Trigger: On 10 per cent appreciation, the appreciated amount is to be transferred to a debt fund
Investment value on March 31, 2010
Without any Trigger, the investment would have been worth Rs 1.87 lakh. With the Trigger, the investment would have been worth Rs 1.97 lakh, with 53 per cent of the investment in the debt fund. Not only was it profitable but the Trigger helped the portfolio remain stable even when the pure equity fund took a deep dip.
