Trigger in mutual fund definition, use, advantages
Trigger is an investment tool which can be used wisely to minimize the risks in share market. Prudent investors are using it to avoid risks. If you also want to use trigger in mutual fund investment, then learn here more.
Investment in share market is always dreadful whether you invest in mutual funds or in unit linked plans of insurance. Investment amount and the return of it increase with bull market but it tends to decrease when the market turns bear. Thus, trigger is used in share market as well as mutual funds to overcome such situations. What is Trigger
Trigger is provided by mutual fund companies as an Add-on facility. Investors using trigger facility rests with negligible risk of losses. Under this facility, investors set the trigger on a certain limit. AMC (Asset Management Company) sell that fund as soon as invested amount touch that limit. Thus the use of trigger ensures automatic booking of profits. Under trigger facility, companies can themselves sell mutual fund units or transfer/switch them in another fund if NAV is more or less than a certain threshold. In simple words, you can say that this is to switch investments from one fund to another so that investors get more returns and less risk.
Trigger is determined by investor himself only. The task of fund house is to implement on behalf of the investor. Investors taking benefit of trigger can transfer their investment from equity fund to date fund, where a fixed deposit is credited in investor's account. Risks involved in date fund are negligible. That is why; most of the investors prefer to invest in date fund via trigger to be safe.Benefits of Trigger to investors
There are lots of advantages of trigger to investor. These can be listed as follow:
1. Since it is a kind of profit booking, thus the investor face minimum risk for his investments.
2. Investor gives instructions to the fund company. The company buys or sell fund before expected fluctuation in the market. This helps the investor to minimize the risk of losses to the maximum extent.
3. Investor can transfer funds from one to another though trigger.
4. Investor has also the option to quit after gaining appropriate profits from his investments.
5. Trigger is a very beneficial financial planning tools with the help of which transfer his responsibility to mutual fund company. How trigger works
The mechanism of trigger can be understood with the help of an example. An investor purchase mutual fund unit @ Rs. 10 per unit. He takes a decision that he will sell them when the NAV of the unit will hit to Rs. 14. For this purpose, he needs to track mutual fund along with fluctuations in share market, which is a quite difficult task. But if he takes help of trigger for this purpose and set the trigger at a Prescribed limit, then mutual fund companies will track the NAV on his behalf and will sell the unit as and when NAV will hit such prescribed limit of Rs. 14. Types of Trigger
Like share market, there are many ways to use trigger in Mutual Fund (MF) industry. It is sole decision of the investor that he wants to use which method of trigger. He can set the trigger on any of the following basis:
a.)When the NAV (Net Asset Value) of mutual fund touch the prescribed limit.
b.) Increase in principal amount to a certain extent.
c.)On the basis of NAV on a specified day or date.Ways to activate trigger
An investor can activate the trigger in any of the following methods:
a.) Encashment of entire unit. Like in case of above example, investor can encash all mutual funds units purchased when NAV reach at the rate of Rs. 14.
b.) Encashment of increase in principal amount. Like in case of above example, investor can encash the profit/ increase in principal only, i.e. Rs. 14- Rs. 10 = Rs. 4.
c.) Switch the principal amount in other schemes.
d.) Switching profits only and keep original amount intact.
e.) Sale of certain units onlyWhere trigger should be set
Now the main question arises- how to set trigger. In other words, trigger will start operating after how much appreciation in investment amount. According to our investment experts, it is best to set trigger on 10-15% increment in NAV. In case of our above example, it is best to set trigger when NAV hit Rs. 11- Rs. 11.5. However, there is no hard and fast rule to set trigger and it can be modified according to the market trends.