The markets have been on a roller coaster ride for some time now. The S&P CNX Nifty went below the 4,800 level just a week ago, only to make a u-turn to settle at 5,000. Since most experts were unclear about the Nifty's future direction, most investors have lost an opportunity to invest at lower levels. In fact, there are innumerable occasions when investors fail to take advantage of the situation in a falling market. The reasons may vary from a long day in office or inability to get the broker on time. Or it could be a classic case where fear sets in, thereby making investors rethink their investment plans. However, there are certain ways to tackle such situations. Here are a few tips.
Trigger
These are simple options provided to mutual fund investors to enable automatic switch of investments, depending on an event in the market. These are two types of triggers – alert-based triggers and action- based triggers. An alert-based trigger is one where an investor is alerted using SMS or e-mail by the fund house or distributor if an event takes place. Once the investor gets information about the occurrence of an event, it is up to him to decide if he wants to act upon it. This can best be understood with an example. Investor A is of the opinion that if the Nifty reaches 4,800, it is a good level to make an investment. He sets an alert-based trigger accordingly by filling up the trigger form. The day Nifty closes at or below the 4,800 mark, the investor gets an alert by SMS and email. At this moment, he may decide to invest more. But what if he does not have time on hand on that particular day?
In that case select an action based trigger. An action-based trigger facilitates a switch from liquid fund to equity fund after occurrence of an event, which can be used for lumpsum investments when markets fall. This can be understood with an example. Investor B is of the opinion that the Nifty at 4,700 is a good level for investing. He wants to invest . 1 lakh at that level. He invests . 1 lakh in a liquid fund and fills up the trigger form. If he chooses to transfer all his units at that level into an equity fund in the trigger form, all his money gets switched to an equity fund if the Nifty closes at or below 4,700. The investor gets to invest at the desired level of market.
You may choose to set triggers using various parameters, such as movement in the Nifty or the Sensex, appreciation of a certain percentage, unit NAV reaching a particular level or even choose to switch from one scheme to another on a particular date. You can also choose to set recurring triggers. For example, you may choose to switch your gains in liquid fund to equity fund, if your gains reach a particular amount. This ensures that your profits of certain size are transferred to equity funds as and when they accrue.
There are investors who use triggers as 'stop-loss' mechanism. For example, an investor may seek an alert if his portfolio value falls 15%. If such an event occurs, he is alerted accordingly and he may withdraw his money to limit his losses. But it is suggested not to become a too 'information-savvy' investor. Equity investments are of long-term nature and acting on short-term volatility may not be good for investors. If an investor decides to redeem his equity investments just because the market goes below a certain level, he may lose wealth creation in long term if markets start upward journey after such a dip.
So far so good. But what if you sign for an action trigger and later you think that you will find a better opportunity? Just cancel the trigger and submit a fresh trigger request with new condition, before the original trigger set by you is acted on. But what if there is a fund that helps you invest more in equity when markets fall and vice versa.
Mutual Fund
Take the example of Franklin Templeton Dynamic P/E ratio fund of funds. This fund invests in Franklin India Bluechip Fund and Templeton India Income Fund. The asset allocation to equity goes up when price-earning ratio of the Nifty at month-end falls. If the market rises and price-earning ratio goes up too, fund manager moves money from equity to a debt fund, thus capturing profits. At lower levels, you invest in equities and at higher levels you get to exit equities in a disciplined manner. Investors can simply invest and let the fund tweak asset allocation with changing market trends. Such funds are good investment vehicles for value-conscious investors. If the markets remain valued at high price earning ratio for long, investors run the risk of remaining invested in fixed income.
Dividend Transfer Plan
There are instances where you come across situations where markets are falling and you do not want to risk your capital. We are facing a similar downtrend since January. "Dividend transfer plan makes a lot of sense if you have invested large sums in liquid fund and want to get exposure to an equity fund without risking your capital. Let us understand with an example. You invest . 10 lakh in a liquid fund with a monthly dividend plan. You may choose to transfer your monthly dividends to equity fund. Though these are small amounts, over a long period of time you get to invest in equities and, more important, without risking your capital.
Capital Protection-Oriented Fund
These funds can be looked at by risk-averse investors. But do not expect too much from them. Capital protection-oriented funds though offer capital protection, but also limit upside. These funds have higher component of debt which ensures an investor gets his capital back and money invested in equities earn some capital appreciation for him.
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