Ride choppy markets with MF triggers

Undecided whether to sell stock market investments after the market run-up or looking to enter but awaiting a correction.

There are mutual fund tools you can use to avoid being glued to the market indices and enter or exit investments based on your personal preference. A mutual fund trigger option lets you invest at a pre-set level, for instance, invest Rs 25,000 when the market falls by 5-10%. Even redemptions can be timed by setting a trigger at a desired level.

Fund houses such as Axis Mutual Fund, Birla, HDFC, DSP BlackRock, ICICI Prudential, IDFC, Mirae Asset Managers Principal, Reliance, Tata, Quantum and UTI offer the trigger facility.

These triggers help you build a profit discipline and ensure you don't get carried away when markets are on a euphoric ride. A market expert not willing to be quoted said, "We are just going crazy. The current stock prices and the scenario at the ground level do not match. Activating some sort of a trigger is safe."

You can transfer fixed amount of investments from equity to debt funds or vice-versa in single or multiple installments. The movement can be based on the actual appreciation of funds or index levels such as BSE Sensex or Nifty 50 growing 5-10% from current levels, even based on price to earnings ratio (the amount one is ready to pay for each rupee of earnings from a company).

"It is always advisable to opt for a price earnings trigger instead of the index levels," suggests Paul D'Souza, chief financial advisor at Cuzzins Investment Services.

Triggers can also be used to meet goals. "Set a time-based trigger as you approach your goal or a price-earnings ratio-based trigger if the markets start moving beyond the justifiable price earnings. Suppose you need Rs 10 lakh for a goal for which you have been saving Rs 5,000 via systematic investment plan for the past five years. If the accumulated Rs 6 lakh has grown to Rs 9.70 lakh as a result of market movement then you should start moving the money out of equity into safer debt options before the markets correct," says D'Souza.

Essentially, triggers are a good profit-retention mechanism. When you opt for moving funds to a debt scheme you can do it in two ways – shift only the gains and keep original amount invested or shift the entire mutual fund holding to protect it from a market collapse.

"If you don't automate the exit from schemes you would be tempted to go on as the markets are rising. You may or may not get the call right at all times. Investors would complain that they may not be able to take the full advantage of zooming markets. But then it is like insurance, where the aim is to reduce risk of a downfall," says Jayant Pai, head – marketing at Parag Parikh Financial Advisory Services Mutual Fund.

Some asset management companies offer an entry trigger, where the money is moved from liquid or debt funds to select equity funds based in the levels pre-defined by you. So, if you find the current levels high for entering and are waiting for a fall then set an entry trigger.

Several advisors advocate the use of dynamic funds for passive investors who do not want to take the guard in their own hands. But one needs to understand that giving up on control also involves the risk of asset allocation getting skewed.

D'Souza says, "Every individual should first look at the asset allocation and then decide on whether they should switch from equity funds to debt funds or from large-cap funds to mid-cap funds using triggers. Under dynamic funds the fund manager would book profits based on his foresight of the market movement. There you wouldn't have the option of sticking to your asset allocation pattern. But triggers allow you to set the allocation right."
Unlike dynamic funds, trigger option is tailored to your circumstances and takes into account performance levels, asset allocation, goals.

But before you opt for triggers for exiting investments ensure that there aren't any exit loads or fee of 0.5-1% to be paid for redeeming from a scheme. Else your net returns would shrink.

Also, set realistic triggers. If you set a trigger of exit when the market appreciates by 50%, your trigger is of little use as these numbers are seldom achievable. Similarly, when using triggers for entering a scheme one should consult an advisor or expert to set a reasonable level.