Protect your gains

ICICI Prudential Target Returns Fund is an open-ended diversified equity fund that seeks to generate capital appreciation by investing in large-cap equity or equity-related securities of companies constituting the BSE 100. It also provides investors with the option to automatically switch their gains or their entire investment to pre-selected debt schemes as and when they achieve pre-set levels of return.

Trigger option. The trigger option is available to those who choose the growth option. The investor has the option to select from a set of four triggers,i.e.,12 per cent,20 per cent,50 per cent,and 100 per cent. On achieving the trigger target,either the appreciation in NAV net asset value per unit initial investment can stay in the fund to earn potential returns by crossing further targets or the entire investment along with the appreciation is switched into any of the four pre-selected debt schemes. The scheme into which the gains or the entire investment is switched is chosen by the investor at the time of investment.

Switch-in schemes. The four debt schemes chosen for switch-in are ICICI Prudential Liquid Plan,ICICI Prudential Floating Rate Plan B,ICICI Prudential Short-Term Plan and ICICI Prudential Income Plan. They were selected on the criterion that investors should not encounter the risk of volatility in the debt market. The returns from these schemes over the one-year,three-year and five-year horizons have mostly exceeded the category average See table.

If the investor does not choose a trigger,then a default option is also available. This will get triggered at 20 per cent. The appreciation in NAV will get switched into ICICI Prudential Liquid Plan.

The investor can also choose not to select any trigger and remain invested in the equity scheme.

Investment strategy. The fund will invest predominantly in the large-cap stocks of BSE 100. This index covers a large portion of the market and large-cap stocks are also relatively liquid. We have chosen to invest in liquid stocks as we do not want any impact on the portfolio due to the selling that occurs as the trigger levels are achieved, says Sanjay Parekh,senior fund manager of the AMC and fund manager of this fund. The markets have been very volatile for the last 15 months. Parekh believes that equity as an asset class will surely outperform debt in the long-term. But given the recent experiences in the market,one can allocate some portion of ones funds in this scheme that aims at capital preservation and promises normal debt-market returns.

Stocks will be chosen based on fundamental analysis. The criteria used for selecting stocks are as follows: companies that exhibit qualities such as strong competitive edge,sustained leadership in market share,a proven business model,financial strength strong balance sheet,good revenue growth and relatively attractive valuations.

Reality checks

Before you invest in this scheme,you need to consider a few points:

No reverse triggers. Once you have switched a portion or your whole investment into a debt scheme,you remain invested in that debt scheme; there is no reverse mechanism to switch back into the equity scheme.

Exit load. An exit load is applicable when an investor switches from equity to debt,depending upon the time period that has elapsed since the investment was made. In the retail segment,investments of less than Rs 2 crore attract an exit load of 1.5 per cent for a period of up to six months. For six to12 months,an exit load of 1 per cent is applicable. No exit loads are charged after 12 months.

Changing triggers. An investor can have one trigger level at one point of time. But if he feels that his objective has changed,he can opt for a change in trigger by filling up a form and investing an additional subscription amount of Rs 1,000,which becomes part of his investment.

Risks

This innovative product does carry a few risks. In the long run,you might see a good part of your returns getting converted into fixed income as one ends up investing a major portion in debt and less in equity down the line. And if the market goes up very quickly,there could be serious tax implications as the profits booked will attract short-term capital gains tax, points out Dhirendra Kumar,chief executive of Valueresearchonline. The former would lead to lower appreciation over the long term say a 10- or 20-year period than in other equity schemes,while the latter would mean you end up paying more tax.

Moreover,in uncertain times like this,investors prefer to invest in funds with proven track records. Says Mumbai-based financial planner Vishal Dhawan: If the fund had used one of its existing schemes for equities as it has for debt,that would have been more appealing.

Bottomline

Discipline is the key to successful investment. An investor who wants to take advantage of regular profit booking and salt away the gains in safe instruments may invest a portion of his savings in this fund, says Kolkata-based mutual fund analyst Prasunjit Mukherjee. 5-10 per cent of your portfolio may be allocated to this fund, adds Dhawan.

Remember that this is a low-risk approach that promises safety but will compromise on long-term returns. Returns from equities are high one year and low or even negative the next. One way to overcome volatility is to have a long investment horizon. If you can weather the volatility,stay in a plain-vanilla diversified equity fund or an index fund. But if you cant,allocate a portion of your funds to this scheme. u

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