Use triggers selectively when investing in mutual funds

Have a long-term outlook | Timing investment is logically impossible because the best entry and exit opportunities are known only in hindsight. No one can predict market movements with certainty. Therefore, it is important to allow your investments to compound over a long term.

When it comes to your investments, being ‘trigger happy’ is the last thing a money expert would want you to be. A hyper active investor typically incurs losses and the market pays one who buys right and sits tight. But buying at the right price is a difficult task. Selling it at the right price is an even more difficult task. In bad times when you are supposed to buy the fear takes over. When the markets are up and your mutual fund portfolio has reached the financial goal, the greed makes you sit through for some extra buck.

Whatever be the case, the greed-fear duo makes your investment decisions difficult. But mutual fund investors have a helping hand in the form of trigger facility. “Trigger facility if used wisely can help mutual fund investors rebalance their portfolios, book profits and even help savvy investors to buy on dips,” says Harshavardhan Roongta, Principal Financial Planner with Mumbai based Roongta Securities. But do not use it for the sake of excitement. Opt for triggers if your needs ask you to do so, he adds.

Triggers drive away emotions from the decision-making process. The triggers also ensure that the plans are executed. This may make many investors consider the triggers in their investment planning. However, before you sign for one do spend some time understanding the triggers.

Triggers are of two types – alert-based and action-based. Alert-based triggers simply send you an SMS or an email and notify about the occurrence of an event. Action-based trigger on the other hand will transact – switch or sell depending upon your instruction. This should be best understood with an example. For example, Nifty is now quoting around 9450 and you have sizeable money in liquid funds.

If you have plans to invest in equity funds if and only if Nifty falls below 8400, enroll for a trigger to that effect. Just fill the trigger form, define the condition and if the condition materializes (Nifty goes below 8400 in this case), money will be switched from liquid fund to equity fund.

Take another case. You have been investing in equity funds using systematic investment plans for the last almost five years. A rally in the market has ensured that you have almost reached your goal. This is the time to enroll for a trigger. Just fill the form and mention the desired level and if the value goes above it, the mutual fund will switch your equity investments into liquid funds.

The trigger facility is offered by fund houses such as SBI, UTI, Quantum, Kotak and Edelweiss. Triggers are based on scheme NAV levels, index levels, folio valuation levels, loss or gains in folio.

"Stock market rally typically leads to a good appreciation in holdings in equity funds and the portfolio deviates from the expected asset allocation. Asset rebalancing can be achieved if you have opted for trigger facility," points out Jignesh Shah, Founder of Capital Advisors.

Triggers thus can bring in the much-needed discipline one needs to achieve investment success. But do not forget that overdoing it will not be of any use. Experts make it clear that too much action invites costs. When you sell a mutual fund holding the tax man is watching you. “Never go for triggers at levels too close to the entry level,” says Jignesh Shah.

The risk is that in a stock market rally the level can be achieved sooner than you expect. If the level is achieved and the units in equity fund are sold by the mutual fund house basis the trigger in less than a year, you will have to pay short-term capital gains tax, Shah adds. Please note all switch transactions are treated as sell transaction for the purpose of tax.

“Your actions must be backed by your financial goals,” says Roongta. If your equity fund is sold and the money has reached your bank account, then you should have some financial goal for which the money should be used. If you are going to look for some other investments in the same asset class for the sale proceeds, then there is no point selling just for the sake of a trigger. It would have been better if you would have held on to that investments, if it was doing good and there was no need of money.

Triggers can be of immense help if you understand your financial goals and your investment needs to achieve those goals. The tips could be of immense help if you choose to use triggers:

1. Spell out the reason behind signing for a trigger facility.
2. Set the trigger right – the condition, the amount, the dates and the action.
3. Know the term for which the trigger will remain active.
4. Do not forget to cancel the trigger if you are going to reuse the same folio and same scheme for some other financial goal.
5. Do not overdo triggers.