Trigger Facility in Mutual Funds: What It Is and How To Use It

8 Basic Principles of Financial Planning
May 8, 2017

Trigger Facility in Mutual Funds: What It Is and How To Use It

Mutual Fund Triggers

Trigger facility in mutual funds is a way for investors to make profits automatically at a pre-defined time or value. Various asset management companies offer trigger option to investors to ensure that they maximize their profits on the sale or redemption of their mutual fund units and make the most of market opportunities without the hassle of constantly tracking market movements.

Using the trigger option investors can purchase, redeem or switch units at a pre-defined time or unit value. An investor can opt for trigger facility by submitting a written application with their asset management company.

Types of Triggers

Triggers can be of various types, as listed below:

  1. Value : Redeem or switch units once your investment reaches a pre defined value.
  2. NAV Based : Redeem or switch units when the NAV reaches a certain value or changes by a certain percentage.
  3. Date : Redeem or switch units at a pre defined date
  4. Capital Gains : Applicable when there is capital appreciation of your investment by a certain percentage.
  5. Reinvesting : Redeem or reinvest when you have achieved your goal of long term capital gain.
  6. Downside : This is applicable when your investment reaches a predefined negative returns percentage
  7. Index Based : This is applicable when BSE/NSE rises or drops by a certain percentage point.

Points to Remember When Using Triggers

Triggers are a very helpful tool as they bring in a level of discipline in mutual fund investment without much effort on the part of the investor. However as an investor you should be wary of certain aspects when using the trigger facility.

  • Don’t opt for triggers that are too close to the entry level. If you do and there is a market rally, you will hit your predefined level pretty soon and may have to pay short term capital gains tax.
  • Decide triggers based on your financial goals. Don’t redeem units just to use a trigger and then reinvest the proceeds. Redeem only if you need the redeemed money for any predefined financial goal.
  • Clearly understand the reasons for setting up a trigger and the consequences of a trigger based redemption/switch.
  • Set any trigger after due considerations and keeping in mind your financial goal or risk appetite.
  • Clearly understand the duration for which the trigger you have set will remain active.
  • Last, but not the least, do not overdo triggers. Triggers are a way. Triggers are a way to bring discipline to your investment. If you use it more than you should, it defeats the whole purpose of using it.
Moiz Choolawala
Moiz Choolawala
Moiz Choolawala is the founder of Plansmart and a SEBI Registered Investment Adviser. An MBA in Finance and Marketing Moiz is an experienced investment adviser and blogs about investments, personal finance, insurance planning and tax planning.

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