Is there a “Safe Strategy” to invest in equities:

Many investors who were sitting on rich profits at 21000 often regret for having not sold their holdings and booked profits at the peak. They started investing in 2006 or 2007 and remained invested all along. Except the dividends received, they did not enjoy the notional profits that zoomed as markets rallied. Above all when we call on such investors advising them to invest since markets are 50% lower from the peak, they say all their money are almost locked in the investment – Hence there is no additional liquidity to make further investment.

One strategy that minimizes risk in equity in the recent meltdown has been to book profits or partial profits periodically. This strategy is particularly useful for investment duration less than 5 years. Very few investors knowingly or unknowingly followed this strategy and made money inspite of volatile market conditions. They are now actively buying at cheap valuation. But this strategy needs lots of discipline, which is seldom found.

For instance, if you invested Rs.1,00,000 in a equity / equity mutual fund in 2007, its value could have sky rocketed to Rs.1,60,000 (in Jan 2008 when index was at 21000) and now its value could be at Rs.70,000 (in Mar 2009).

In a partial profit booking strategy, as the value of the investment grew the excess profit would be ‘shaved’ off. Say when the investment value became Rs.1,20,000 the excess Rs.20,000 (20%) is shaved off. Again whenever the investment value grew by 20% percentage, the investor would shave off the profits (Perpetual Trigger). In Financial Planning we call this as “Asset Rebalancing”. By doing so, the investor would have pulled out Rs.60,000 so far. Hence even at the current value of Rs.70,000 he would not be worried when compared to the person who did not enjoy the fruit at all and sits at a net loss of Rs.30,000 (Rs.1 Lakh minus Rs.70000 present value).

Though by concept it may appear simple, 99% of the investors find it cumbersome to execute such decisions. Direct equity investors have no other options but to get disciplined and book partial profits by active management.

Mutual funds offer this concept in the name of “Trigger Options” wherein once the percentage growth (say 20%) is reached the fund would be automatically be switched or redeemed as per your pre-determined direction. The only shortfall of this option being, the entire investment is profit booked – there has been no choice of holding your investment (having a cake) and enjoying the profits alone (eating it too). Hence partial profit booking was done manually by active monitoring and reviewing of portfolio

Necessity is the Mother of all Inventions:

No doubt, when we are cornered we explore new opportunities / strategies / concepts. And investment management is no exception.

ICICI Prudential Mutual fund seems to have ‘felt’ the lacuna in this concept and has launched “ICICI PRUDENTIAL TARGET RETURNS FUND”. This fund exactly works in the way explained in the example above. This fund has introduced Perpetual trigger for the first time in Indian MF’s

The uniqueness of this fund are:

• It is a plain diversified large cap (open ended) fund
• You can prefix the target – so that once it is achieved profit is booked.
• You can either redeem the entire investment or
• You can redeem the capital appreciation alone
• When equity markets are rising and hitting targets, the fund trigger helps investors rebalance the investment
• Helps you create cash (out of the profit booked) which can be used to invest when markets are falling.
• Provides investors with an asset allocation rebalancing tool
• Keep emotion and sentiment out of the investment process
  
  Our Call on this Product:
• It is a Good concept to invest in.
• It is high time investors bring in some discipline into their investment. Just like the way
• SIP is a disciplined form of investment, this Target Return fund is yet strategy which could be highly be useful for one shot investment.
• It is a rare product where you can stay invested and book the profits alone. You get regular cash flow which can keep you smiling all the day.
• Since ICICI MF is the only company to have this option of Perpetual trigger, investors in ICICI MF can invest in TARGET RETURN FUND and make use of it.
• But for other fund houses – include the Trigger option for all your investments from now on. It is better to be safe than to feel sorry later.