Is ‘Trigger SIP’ A Prudent Choice? Know Here…
Jul 30, 2019

Author: Divya Grover

(Image source: Image by Gerd Altmann from Pixabay)

Investing in mutual funds through systematic investment plan (SIP) helps you achieve your financial goals in a systematic manner. If you have invested in equity funds, it is best to transfer your investment to low-risk avenues like liquid funds when you are nearing your financial goal.

You can achieve your target as per the time horizon you've set. But if the market conditions are favourable, you might be able to achieve it earlier. In such cases, a trigger SIP facility can help you redeem your investment when the target amount is achieved and switch to any other fund of your choice.

A trigger SIP facility in mutual fund allows investors to redeem part or full amount or switch investment to another scheme automatically when it reaches a pre-defined trigger point. A trigger can be set for both upside or downside events. Thus, the facility helps investors to reduce market risk to an extent.

Here are the types of trigger:

NAV trigger

Investors can set an NAV appreciation or depreciation percentage for exiting the scheme. For example, if the investor thinks increase in NAV by 10% will make it overvalued he/she can set trigger to exit at that level. The NAV of the day on which the trigger activates will be applicable for the transaction.

Index level trigger

Investors can specify the index level appreciation or depreciation as the trigger to redeem/switch investments. For example, trigger will be initiated if Sensex falls by 300 points and this will help investor to cut losses.

Capital trigger

Investors can indicate the capital appreciation or depreciation level in monetary terms to activate the trigger. For example, a capital appreciation of Rs 1,00,000 is needed to achieve your goal and so trigger can be set to exit the scheme when that amount is reached.

Time-based trigger

Investors can set the trigger to be activated on a particular date. For example, if an investor expects the bear phase to set in from next month, they can specify that date to exit the scheme.

Investors can choose any one of the available triggers. If the investor does not maintain sufficient balance in the source scheme on the trigger date, the trigger will not be activated. The trigger will not be executed if the units are under pledge/lien. Once registered, the trigger cannot be modified and fresh application will have to be made to change the mandate. Trigger mandate has to be renewed after a certain period.

The facility can be a good solution for investors who do not want to track the performance of the scheme on regular basis. Investors who have immense knowledge about market conditions can opt for this facility to set the trigger as per their perception. If the pre-specified target amount is achieved, the trigger activation will be helpful for booking profit or switching to another scheme of your choice.

Investors should remember that each trigger is treated as an exit and applicable load and/or capital gain tax will be levied.

[Read: Why Discontinuing Your SIPs Now May Be a Bad Idea]

While the facility may help cut losses during market crash, investors may lose out on the opportunity of higher gains during a bull run.

SIPs are designed to help investors achieve their financial goals as per their risk appetite and time horizon. Exiting the scheme before the target is achieved will cause you to miss out on your goal. This can be detrimental to your financial wellbeing.

Every investor should adopt a prudent and planned approach to investing and to avoid ad hoc investment decisions, either to buy or sell mutual fund units.

Track and review the performance of your portfolio periodically and sell your investment only if:

  1. You have met your financial goal

  2. You need to rebalance your portfolio

  3. Your mutual fund scheme underperforms

  4. The change in fundamental attributes or investment objective of the scheme does not align with your objective/risk profile

  5. You find a better alternative.

Investing regularly through SIP ensures that market volatility is kept under check and your goal is achieved. You do not have to time the market for that purpose. Besides, timing the market is a futile exercise and can lead to unnecessary churning of portfolio. Investors should not be worried about short-term fluctuations in market if they are investing through SIP and stay invested for the long-term.

Editors' note:  Do you want to know the best mutual fund schemes to SIP into, ELSS for tax saving this year, and schemes that have the potential to provide BIG gains?

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