Understanding Triggers by Asset Management Companies in Mutual Fund Investments

By BankBazaar | May 2, 2012

Investors in the mutual fund market hardly have the time to track the behavior of the markets themselves, and thereby  lack an understanding of when to make an entry in a mutual fund scheme or exit from an unprofitable venture. Hence, a safer bet would be to make use of the trigger facilities offered by several asset management companies (AMC). With the help of this facility, you can fix the date where you intend to enter the market, set your desirable price and index level, and leave the market as soon as you achieve the required results.

Often people make the error of acting hastily when the market outperforms expectations, with investors raising the levels of their previous targets, without fulfilling the prerequisite of booking profits. Realization dawns on them only when the market steadies itself and reaches a level wherein investors either lose miserably or fail to make any profits. This trigger mechanism is especially beneficial for those investors, who choose to set a preferred trigger amount, and depending on this, they can opt to shift their money from equity funds to debt funds. It thus, helps you practice a profitable discipline of investment in mutual funds, helping you earn profits at the right time and leave once you have achieved those desirable returns, especially for realizable goals like that dreamy vacation or top-of-the-line gadget. What more? Several famous mutual fund houses in the country like ICICI Prudential Mutual Fund, Tata, Reliance, and Birla Mutual Fund are offering this blessing in disguise to investors.

In order to comprehend the functioning of triggers, it is important to understand the various types of triggers offered in the market, which often vary from one mutual fund house to the other. While most of these fund houses help you move your investment in a debt fund, certain asset management companies like IDFC, ICICI Prudential, and HDFC also offer an entry trigger. This trigger sets a predefined level, where the money is moved from debt funds to selected equity funds. While fund houses make this switch, they offer two options: an investor can choose to switch only the profit, thereby keeping his original investment intact, or he can also select to choose the whole investment along with the profit, so as to protect it from shrinking. Thus, the levels of return you expect and decide heavily depend on your perception of risk. It is important to remember that trigger facilities are based on the golden rule of buying low and selling high. It eliminates unprofitable elements like emotions and discretionary ingredients from making further unplanned investments, once your desirable goal has been met. While this tool is best suited when expecting returns to meet short-term goals, there is no need to set a trigger when making investments for a long period of time.

Exit load is an important factor investors need to understand before redeeming units within the period of one year, when you have achieved your expected returns within the desirable time period. While different fund houses have their own terms in this regard, investors must watch out for policies and regulations of the mutual fund house in this regard. Also, when money is shifted from the equity fund scheme to the debt fund once your desirable target has been achieved, no exit load will be charged. However, if you choose to withdraw from the debt fund, you will have to bear charges of the exit load. Thus, in order to avoid these charges, choose a liquid fund when shifting your funds to a debt fund scheme. Once your desirable target has been achieved, and money is moved to the debt fund, the entire appreciated amount will be levied with a capital gains tax, depending on the time period in which the target was achieved by the investor. On the other hand, a move of funds within the period of one year will be taxed in the category of short-term capital gains, even if you have not sold your units. The investor is not required to pay taxes if his achievable results have been met after the period of one year, as long-term capital gains tax are not applicable on mutual fund schemes. Investors must also be wary of fixing a trigger level without having any idea on when their expected results will be met. In such a scenario, it is advisable to select a level after accounting the taxes you may have to pay after such a period of time.

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