Automated investment decisions have always had a bad press. Algorithm trading, which is not yet widespread in India, has been routinely held guilty for all kinds of market crashes, as well as an alleged general increase in market's volatility. Anyhow, whatever algorithmic trading kind of things do or don't, I'm mostly a fan of automating investment decisions at the level of individual investor, especially for mutual fund investments. However, the kind of automation I'm referring is not about special algorithms running on high-speed computers, but humble facilities like STPs (Systematic Transfer Plans), SIPs (Systematic Investment Plans) and triggers.
Of these, SIPs and STPs are reasonably well-known among investors, but triggers are not. That's a pity, because triggers are widely available from fund companies and are an excellent way of taking the emotion out of fund investing. They can also be used to construct a sort of a custom investment plan-a kind of simple algorithmic trade in mutual funds-that can be better suited for your needs.
Let's first see what triggers are, in the sense we are talking about. To give a textbook definition, a trigger is an investing action that is triggered by an event. It'll probably make more sense if I give a simple example. Suppose you'd like to redeem your investments when their value reaches a certain amount. You could give instructions to a fund company to the effect. This is a trigger which activates when the NAV reaches a certain level and the action triggered is a full redemption of your investments, regardless of when it happens.
Here's a slightly more complex example. Let's say you are investing for a long period but want to ensure that you initial capital remains safe. You could invest in a short-term debt fund and create a trigger which, once a month, redeems all your gains and invests them in an equity fund. Over a long period, this would effectively act as a capital protection fund with the added advantage of being open-ended.
There's a wide variety of triggers available both in terms of the events that trigger the action and the action that gets triggered. The triggers can be based on value, NAV or gains. That is, something can get triggered when an investment reaches a certain value, a certain NAV or when it makes a pre-determined amount of gain or loss. They can also be simply time-based, happening on a particular date every month or year. They gain / loss triggers can be based on absolute value or a percentage.
The triggered actions are the transactions that an individual can do to his mutual fund investments. This means redemptions and switches to other, predetermined funds. The interesting part if that the amount to which the trigger action is applied can itself be determined automatically. So, as in the above examples, it could be an entire investment or it could be gains, or it could be just the value above a certain pre-determined level. It could also be based on the number of units-the details vary somewhat between different AMCs.
However, beyond the mechanics of the trigger system, investors should appreciate the fact that triggers are not so much an investment technique but a technique to manage your own psychology. Like their simpler cousins, the SIPs and the STPs, triggers help you avoid being swayed by momentary considerations. For example, suppose, as in the second example above, you want all gains in a liquid fund to be shifted to an equity fund. Then, the market falls and suddenly, you cancel the trigger because you don't want to get into equity. That would defeat the origin purpose of the trigger.
Triggers are an under-used but sharp tool to manage your investments. If understood and used well, they can be very useful.
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