Enforcing discipline

Investments in equity markets can be quite profitable,provided we have a disciplined approach. The mantra for good returns is to set realistic....

Investments in equity markets can be quite profitable,provided we have a disciplined approach. The mantra for good returns is to set realistic returns and book profits as soon as they are achieved. However,most equity investors either dont set targets,or they neglect to book profits due to expectation of further gain. To plug these loopholes and make investors book profits at regular intervals,several mutual fund houses offer target return funds. But do these plans make sense or should investors do the juggling between equity and debt funds themselves?

fund BASICs

Target return funds allow trigger-based switches from one asset class to another equity and debt. At the time of making the investment,you have to set a target that will decide the course of your investment. Suppose that you have invested in an equity fund and set a target return of 20 per cent. Once this target is achieved,money from the equity fund will automatically flow into a debt fund of your choice. Thus your profits get booked and you cant lose your gains due to the vagaries of the equity markets. Target return funds at least some of them allow investments to flow from equity to debt schemes and vice versa. The triggers can be in the form of percentages or index levels.

Fund choices

Several options exist in this space. We have chosen four,based on their unique selling points.

ICICI Prudentials Target Return Fund. This is the latest fund to enter this space. Investments are initially made in an open-ended equity fund. Investors have to choose target returns,based on which switches will take place from equity to any of the four debt funds. The fund house offers a choice of four trigger options: 12,20,50 or 100 per cent.

Say,for instance,you make an investment in the equity fund at an NAV of 10 and choose 20 per cent as target return. The day the NAV closes at 12,the gains made or the total invested amount are switched to the chosen debt fund.

Birla Sun Lifes Frontline Equity. This plan too works in the same fashion as ICICIs. The fund house offers this facility with its Frontline Equity Fund. You can set a target return of 15,30,50 or 100 per cent. Based on these trigger points,profits will be booked and gains or total investment will be switched to a debt scheme.

HDFCs Flexindex. Unlike ICICI Pru and Birla Sun Life that book profits in equity schemes,HDFCs Flexindex Plan allows you to invest in their debt funds first and time your entry into the markets at the desired levels. You can invest in select debt or liquid fund schemes and indicate trigger points BSE Sensex levels at which your investment should be switched to an equity fund. The investments can be switched in two ways : fixed and flexible instalment option.

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Under the fixed option,every time an index level is breached,a fixed amount 25 per cent of your investment will flow into the chosen equity fund. The flexible instalment option,on the other hand,allows you to move your funds,from debt to equity,in variable amounts.

In case the set targets are not achieved within one year of investment,the corpus will be transferred to equity funds in a phased manner.

IDFCs Money Manager Fund. This plan clubs the features of all the plans mentioned above. The AMC offers the trigger facility under its Money Manager Fund-Treasury Plan. Based on the trigger points,this plan allows you to invest in the markets at the desired levels and also exit from equity schemes and re-enter debt schemes to preserve the gains accrued.

Entry trigger. These triggers dictate the flow of your investments from debt to equity. The minimum investment amount of Rs 25,000 is first put in the original debt scheme Money Manager Fund. The money invested by you will be transferred to the equity funds in two equal lots based on the two trigger points BSE Sensex level.

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Exit trigger. This is used to transfer the funds back from equity to debt. On the activation of exit trigger,the fund house will book the profit and transfer the entire corpus to the debt fund.

Negatives of such plans

The first and foremost is the entry and exit load. Even though the switch option is in-built,you will have to pay an entry and exit loads for the respective funds in case of a switch.

Secondly,of these four,IDFC offers the most flexible structure: it allows investors to move back and forth between equity and debt funds. The others do not. Allowing just a single movement of funds from debt to equity or vice versa leaves the investor paralysed as he cant take any further action.

Thirdly,and most importantly,these funds cap your upside gains. In case of a secular bull run over the next few years,you would be better off with a buy-and-hold approach in an index fund or a quality diversified equity fund. By setting a target,you cut your exposure to equity and thereby deprive your investments of the benefits of long-term growth.

What should you do?

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Even with these limitations,these funds make some sense for not-so-disciplined investors. These funds are good tools that allow investors to set a realistic target return and book profits in line with the target. You can allot 10 per cent to such strategic funds, says Surya Bhatia,a Delhi-based financial planner.

However,before you buy any of these funds,take a closer look at them. Look at two parameters structure of the fund whether it allows only debt to equity or equity to debt or both and also the performance track record of these funds, says Vishal Dhawan,a Mumbai-based financial planner.

For disciplined investors,the do-it-yourself approach will work better. You can invest in an index fund or a top diversified equity fund and set targets for yourself. You are likely to get better returns and more flexibility that way. suneeti.ahujaexpressindia.com