Setting triggers on equity mutual funds

Equity mutual funds are among the most tax efficient and best inflation-beating long-term investment vehicles. But they come with their set of challenges too. Predicting the direction of the market is not easy. So, timing entry and exit is a difficult proposition. Systematic investment plans (SIP) offered by mutual funds help investors invest in a systematic way without having to worry about the timing.

Even so, what if you have specific targets in mind and the market zooms up or goes down too much and too fast for your comfort? This is where the trigger facility offered by some mutual funds can help.

Trigger types

Th trigger facility comes handy when you don’t have the time to monitor the market and your investment on a regular basis. The facility allows investors to choose an event upon occurrence, when the fund house will switch money out of that equity scheme. As an investor, you can either choose to redeem it as cash or switch to a debt scheme.

Triggers are of two types — alert-based and action-based.

In an alert-based trigger, the fund house notifies you through a short messaging service (SMS) when the trigger level is achieved. For instance, if you have opted for an NAV (net asset value)-based trigger, say, 10 per cent increase in the value, the moment the NAV is 10 per cent higher than the level at which the trigger was set up, you will receive an intimation from the fund house.

You can choose to either act on it by redeeming the investment or switching to a debt fund. Or you can choose not to act on the alert and continue to hold on to the investment.

On the other hand, in an action-based alert, once the trigger level is reached, the investment is either redeemed or switched automatically.

Trigger events

Mutual fund houses allow triggers to be set up based on the change in scheme NAV (increase or decrease), index level, total capital appreciation or depreciation, or a specific date. Trigger events and thresholds, though, vary across fund houses.

NAV and index level-based trigger can help contain losses in case of sharp declines or book profit when the market moves up very sharply and may be ripe for correction.

In an NAV-based trigger, the investor can set the percentage change in the NAV to activate the trigger. For instance, SBI Mutual Fund has set 5 per cent as the minimum change in NAV and multiples of 1 per cent thereafter. So, if the scheme NAV is ₹10, and you have set a trigger for redemption on 5 per cent appreciation, the redemption will be effected the moment the scheme’s NAV touches ₹10.5.

Likewise, in an index-based trigger, an investor can set the trigger limit in terms of rise or fall in the index.

Quantum Mutual Fund, for instance, allows setting up triggers based on the change in index value either as a specified number of points or as a percentage change from the date of registration. One can choose between the bellwether indices S&P BSE Sensex and Nifty 50.

The other trigger events — based on change in the total investment value and the specific date-based trigger can serve as a financial planning tool. For instance, if you have invested ₹1 lakh and target 50 per cent appreciation to meet a specific life goal, you can set the investment value of ₹1.5 lakh as the trigger. The moment the total investment value touches ₹1.5 lakh, the trigger will be activated.

Likewise, if you have a life goal, say, a few years from the time of investment, you can set the date as the trigger.

For instance, if you anticipate the need for the corpus for your child’s higher education five years down the line, you can set the trigger date accordingly.

Several mutual fund houses such as UTI Mutual Fund, Quantum Mutual Fund, SBI Mutual Fund, Principal Mutual Fund, Kotak Mutual Fund and Edelweiss Mutual Fund offer this facility.

Can you register multiple triggers? Some fund houses allow you to do so, others do not. For instance, SBI Mutual Fund allows you to register only one trigger while Quantum Mutual Fund allows you to choose a combination of triggers. However, the trigger will be actioned only once.

So, if you had set two triggers, say, on investment value change and appreciation in the S&P BSE Sensex, the one that is triggered first will only be actioned and the other will be automatically deactivated.

You need to fill in the trigger form available with the fund house to activate the same.

The trigger facility can come handy for those who don't have the time to track equity market and their investment regularly.

An alert-based trigger may be better compared to an action-based trigger.

This is because, investors can take stock of their investment portfolio, understand the rationale behind the steep rise or fall in market and then decide either to redeem or stay put.

The writer is co-founder, RaNa Investment Advisors

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