This facility is good for long term equity fund investors, if used selectively
What is trigger facility in mutual funds?
Trigger facility enables investors to set target (also called ‘trigger point’) based on pre-specified date, price and index level as per their need, risk appetite and goals.
Example: A person invests Rs 10,000 in an equity scheme and buys 1000 units in NAV of Rs 10 and opts for trigger facility where he requests the fund house to transfer his profit to an income scheme once his investment generates 20 percent returns. So, whenever the NAV of his investment grows 20 percent i.e. if it reaches Rs 12 then Rs 2000 is automatically transferred to the income scheme.
Similarly, he can request for a transfer if his investment hits a pre-determined point on the downside. In this example let us say, he would not like to lose more than 20% of his investment. In such a situation, he can ask for a transfer to the income scheme when the NAV hits Rs. 8.
As can be seen, investors can set trigger points for both upside and downside conditions. They can also redeem their entire investment or transfer full portion in any scheme after reaching pre-specified target.
Trigger facility enable investors to shift easily between debt and equity funds within the same fund house.
This facility helps investors to check market volatility to some extent. Investors can book profit, transfer their earnings to other schemes and reduce market risk by opting for trigger facility.
Based on various parameters triggers can be classified as value triggers, downside/upside triggers, index based triggers and date triggers. At present, many fund houses like DSP BlackRock, Birla Sunlife, HDFC, UTI, ICICI Prudential, Quantum, Principal, Reliance, Tata and SBI provide trigger facilities in their schemes selectively.
How can advisers help clients in using trigger facility?
Experts say that advisers should determine the goal and risk appetite of the investors while setting a trigger points for their clients. According to Nikhil Kothari of Etica Wealth Management, “Trigger facility is good for long term lump-sum investment in equity schemes. Let us say, an investor invests Rs 1 crore in an equity fund with a target of achieving a total appreciation of 60 percent over 5 years. If his trigger point is achieved in just three years, then he is better off switching from the equity fund to a debt fund as it will provide him more stable returns. Trigger facility may not be a good idea for SIP investors.”
Tejal Gandhi of Money Matters believes that advisers should keep in mind the risk profile and asset allocation while helping their clients set trigger points and use this facility judiciously in long term investments to generate good returns for their clients.
Pros and cons of trigger facility
Trigger facility is good for passive investors who don’t prefer to track their investments. In event of market crash, investors can exit by cutting their losses with this facility.
Similarly, in event of a bull run, investors may lose an opportunity on profit booking. Trigger facility needs to be renewed after certain point of time. Also such triggers can mean exit loads and taxes. If target point of an investor is achieved in an equity fund in a short period of say 6 months, it will attract short term capital gain tax and/or exit load.