FIX A LEVEL TO INVEST OR REDEEM MF's... AVAIL TRIGGER FACILITY
Our busy schedules leave us little time to track the markets and know exactly when to invest in a mutual fund scheme or when to exit one. If you don't want to lose out on investing opportunities, a good idea is to avail of the trigger facility provided by asset management companies (AMCs).
This tool allows you to fix a date, price or index level at which you want to enter the market and get out when the expected returns have been achieved.
"When the market starts moving up, investors often raise their previously set targets without booking profits. Realisation sets in only when the market corrects itself and reaches a level where investors either fail to gain or even lose their investments," says Sankaran Naren, CIO equity, ICICI Prudential AMC.
The trigger mechanism is especially useful for passive and conservative investors, who can set a trigger amount or a percentage of appreciation, and based on this, their money can be shifted from equity funds to debt funds. Kalpen Parekh, deputy CEO at IDFC Mutual Fund, says, "It helps you build a profit discipline so that you accumulate at the right time and exit when your return expectations are met."
So, one can choose targets based on near-term goals, such as buying a laptop or going for a holiday. Says Ajit Menon, executive vice-president and head of sales at DSP BlackRock Mutual Fund: "This feature can help investors and financial advisers in planning for financial goals."
DSP BlackRock is the latest fund house to have introduced this facility this month, joining the AMCs that have been offering it for the past couple of years. These include Birla Mutual Fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund, IDFC Mutual Fund, Principal Mutual Fund, Reliance Mutual Fund, Tata, Quantum and UTI Mutual Fund.
Different types of triggers
There are several trigger options (see Types of Triggers), though these differ between fund houses. However, each of these will help you earmark the point at which you want to redeem your funds or shift from one type of fund to another. For instance, if you choose to switch appreciated capital, you can fix a percentage of gain, say 10%, 30% or 50%. When your investment amount grows by this figure, the profit you have earned can be moved to debt funds, while the original amount remains in the equity fund.
This tool allows you to fix a date, price or index level at which you want to enter the market and get out when the expected returns have been achieved.
"When the market starts moving up, investors often raise their previously set targets without booking profits. Realisation sets in only when the market corrects itself and reaches a level where investors either fail to gain or even lose their investments," says Sankaran Naren, CIO equity, ICICI Prudential AMC.
The trigger mechanism is especially useful for passive and conservative investors, who can set a trigger amount or a percentage of appreciation, and based on this, their money can be shifted from equity funds to debt funds. Kalpen Parekh, deputy CEO at IDFC Mutual Fund, says, "It helps you build a profit discipline so that you accumulate at the right time and exit when your return expectations are met."
So, one can choose targets based on near-term goals, such as buying a laptop or going for a holiday. Says Ajit Menon, executive vice-president and head of sales at DSP BlackRock Mutual Fund: "This feature can help investors and financial advisers in planning for financial goals."
DSP BlackRock is the latest fund house to have introduced this facility this month, joining the AMCs that have been offering it for the past couple of years. These include Birla Mutual Fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund, IDFC Mutual Fund, Principal Mutual Fund, Reliance Mutual Fund, Tata, Quantum and UTI Mutual Fund.
Different types of triggers
There are several trigger options (see Types of Triggers), though these differ between fund houses. However, each of these will help you earmark the point at which you want to redeem your funds or shift from one type of fund to another. For instance, if you choose to switch appreciated capital, you can fix a percentage of gain, say 10%, 30% or 50%. When your investment amount grows by this figure, the profit you have earned can be moved to debt funds, while the original amount remains in the equity fund.
Another fund house may offer the same facility under a different name, such as NAV option. So, you can fix a criterion that if the NAV rises from Rs 20 currently to Rs 30 (or your investment grows from Rs 10,000 to Rs 15,000), the gain, that is Rs 5,000, can be redeemed or shifted to another fund. Similarly, if you have to pay, say, the instalment for a laptop on 1 October, you can fix the trigger date a few days before it.
While all fund houses offer to move your appreciated investment to a debt fund, a few AMCs, such as HDFC, ICICI Prudential and IDFC, also have an entry trigger. Here, if the trigger is set at a predefined level, the money is moved from debt funds, such as liquid funds or money manager funds, to select equity funds.
Says Parekh: "In a market phase like the current one, we will not see a significant movement and will be range-bound between 17,000 and 20,000. However, even in this phase, there is a band of 20% that can benefit investors. You may want to invest half your funds when the Sensex level is, say, 19,000 and the rest when it is at 17,500. Also, you could withdraw when the Sensex crosses 20,000."
While switching funds to a debt scheme, fund houses offer two options-switching only the gain and keeping the original investment intact, or switching the entire investment along with the appreciated value to protect it from shrinking.
How to choose a level
The level of returns that you can choose will be based on your risk perception. "The return expectations should be linked to your goals. Though an investor will compromise on a bull run, a 12-15% return from equity is good considering the present GDP and inflation estimates," says Rajendra Dhulla, a financial planner who runs advisory firm Pratham Services. Levels of 50% and higher would hardly be met during your time frame and only under select sectoral funds, says Dhulla.
Sandeep Shanbhag, director at investment advisory Wonderland Consultants, says, "The trigger facility works on the classic principle of buying low and selling high. It is a way of weeding out emotion and discretion from investing once the goal is met." However, he suggests, "If the goal is for the long term, such as saving for retirement or child's education, then there is no need to opt for a trigger."
Applicable loads
What happens if the fund charges an exit load if you redeem units within a year and your targeted returns are achieved within this time frame? Each fund house has its own policy. For instance, ICICI Prudential Mutual Fund customers would have to bear the applicable exit load, while IDFC Mutual Fund does not levy this charge. "There is no separate exit load for the investors who book profits using the trigger option as this would wipe out a portion of the return," says Parekh of IDFC.
There is a catch here. When the money is moving from the equity fund to the debt fund on achieving the target, there is no exit load. However, when you withdraw from the debt scheme, you will have to bear the exit load. To avoid paying this load, when you shift the money to a debt option, choose a liquid fund. Taxation
If your target is achieved and money is transferred to the debt scheme, the appreciated amount will attract the capital gains tax based on the time at which the target was achieved.
"A transfer or a switch within a year will be taxed as short-term capital gains of 15% on equity, though you may or may not have sold the units," says Shanbhag. However, you won't have to pay tax if your target is achieved after a year as there is no long-term capital gains tax applicable on mutual funds.
To avoid losing a part of expected returns, Shanbhag suggests, "When fixing a trigger level, you may not know time frame in which the target will be met. So, choose a level after accounting for the tax you may have to pay."
Says Parekh: "In a market phase like the current one, we will not see a significant movement and will be range-bound between 17,000 and 20,000. However, even in this phase, there is a band of 20% that can benefit investors. You may want to invest half your funds when the Sensex level is, say, 19,000 and the rest when it is at 17,500. Also, you could withdraw when the Sensex crosses 20,000."
While switching funds to a debt scheme, fund houses offer two options-switching only the gain and keeping the original investment intact, or switching the entire investment along with the appreciated value to protect it from shrinking.
How to choose a level
The level of returns that you can choose will be based on your risk perception. "The return expectations should be linked to your goals. Though an investor will compromise on a bull run, a 12-15% return from equity is good considering the present GDP and inflation estimates," says Rajendra Dhulla, a financial planner who runs advisory firm Pratham Services. Levels of 50% and higher would hardly be met during your time frame and only under select sectoral funds, says Dhulla.
Sandeep Shanbhag, director at investment advisory Wonderland Consultants, says, "The trigger facility works on the classic principle of buying low and selling high. It is a way of weeding out emotion and discretion from investing once the goal is met." However, he suggests, "If the goal is for the long term, such as saving for retirement or child's education, then there is no need to opt for a trigger."
Applicable loads
What happens if the fund charges an exit load if you redeem units within a year and your targeted returns are achieved within this time frame? Each fund house has its own policy. For instance, ICICI Prudential Mutual Fund customers would have to bear the applicable exit load, while IDFC Mutual Fund does not levy this charge. "There is no separate exit load for the investors who book profits using the trigger option as this would wipe out a portion of the return," says Parekh of IDFC.
There is a catch here. When the money is moving from the equity fund to the debt fund on achieving the target, there is no exit load. However, when you withdraw from the debt scheme, you will have to bear the exit load. To avoid paying this load, when you shift the money to a debt option, choose a liquid fund. Taxation
If your target is achieved and money is transferred to the debt scheme, the appreciated amount will attract the capital gains tax based on the time at which the target was achieved.
"A transfer or a switch within a year will be taxed as short-term capital gains of 15% on equity, though you may or may not have sold the units," says Shanbhag. However, you won't have to pay tax if your target is achieved after a year as there is no long-term capital gains tax applicable on mutual funds.
To avoid losing a part of expected returns, Shanbhag suggests, "When fixing a trigger level, you may not know time frame in which the target will be met. So, choose a level after accounting for the tax you may have to pay."
