Mutual funds offer different types of Systematic Investment Plans (SIPs) which suit various investment preferences and goals. One of these options is the trigger sip. This type of SIP offers much more flexibility and customisation than a regular SIP but is also a lot more complex. As such, these SIPs are generally more suited to experienced investors who have a good understanding of the market. By using a trigger in mutual fund SIPs, you can take advantage of new opportunities, reduce the need for constant market monitoring, and earn higher returns.
Let’s understand what trigger SIPs are and how they work.
What is a Trigger SIP?
A trigger sip is a type of SIP that allows you to time your investment based on conditions known as ‘triggers’. A trigger in mutual fund SIPs is like an activation switch. Basically, if a certain condition that you specify comes to pass, a certain action, also defined by you, gets taken automatically.
For example, you can set a trigger in your SIP that if the NAV (Net Asset Value) of a mutual fund falls below Rs. 1,500, the SIP automatically invests a pre-decided lump sum amount into that mutual fund. What this does in this case is that it enables you to take advantage of a market dip without needing to monitor the market constantly.
There can be many types of events that you can set up triggers for, such as the index falling or the NAV going higher. Generally, three types of actions automatically get taken. You can either make a new investment, redeem your units fully or partially, or switch from one fund to another.
How Does a Trigger SIP Work?
A trigger sip is different from a regular SIP. In normal SIPs, you invest a fixed amount regularly into a mutual fund. On the predetermined date, the fixed amount gets deducted from your linked bank account and gets invested regardless of market conditions. However, trigger SIPs are different. They allow you to set conditions, which once met, automatically start an investment action. This could involve a number of things like investing a certain amount in your chosen mutual fund, redeeming units, or even switching funds.
Let’s take another example. You can set a condition where you will automatically redeem your units should the Sensex fall by 200 points. Here the trigger is Sense falling by 200 points, and the action is to redeem your investment. Doing so will either lock your profits or limit your losses automatically.
Similarly, there are various types of triggers available to investors based on their risk tolerance and investment strategy. The trigger in the above example could be useful for conservative or risk-averse investors who want to protect their investments during market downturns. Beyond this, triggers can help investors maximise their profits. This can be done by capitalising on favourable market conditions.
For example, you can set a trigger to invest more funds when a market index like the Sensex or Nifty hits a certain low. This will allow you to buy more units at a lower price and you can benefit from higher gains when the market recovers. Since these executions are automatic, investors also don’t need to monitor the market conditions constantly. One can always change the triggers as their strategy or the market conditions change.
Types of Triggers in SIP
As you can see triggers can be quite powerful, and choosing the right ones for your financial goals, risk tolerance, and investment strategy is very important. Here are some types of triggers you can use in your SIP:
1. Time or Date-based Triggers
One of the simplest types of triggers, here the SIP gets activated on a specific date. For example, if you are expecting that the stock price will fall next month and a bear phase will begin, you can set a trigger to redeem your mutual fund units on a specific date before the downturn you anticipate begins.
2. NAV-based Triggers
These triggers are tied to the Net Asset Value of a specific mutual fund. The SIP gets triggered when the NAV falls or rises above an amount set by the investors. For example, a trigger can be set up where Rs. 1 lakh gets invested automatically when the NAV of a fund falls to Rs. 500. This way, the investor can buy more units at a lower price and take advantage of market dips.
3. Event-based Triggers
These types of triggers encompass a very wide range of conditions that are tied to specific events, either within the market, related to the mutual fund itself, or in your personal life. For example, a trigger can be set that activates the SIP when there’s a change in the fund manager.
4. Index-based Triggers
As the name suggests, these types of triggers are related to the performance of a specific market index, such as the Nifty 50 or the Sensex. For example, you can set a trigger where your investment gets automatically redeemed should Sensex fall by 400 points or 10%. Similarly one may set a trigger that makes them invest more when Nifty 50 drops by 5%. As you can see, these situations allow investors to either safeguard their capital or capitalise on short-term market corrections, which is why these types of trigger SIPs are very popular amongst investors.
5. Capital-based Triggers
You should always keep your financial goals in mind when selecting SIP triggers. Capital-based triggers let you exit and enter a fund when a certain level of capital has been accumulated. For example, suppose you were planning on staying invested in an equity mutual fund for 10 years to accumulate Rs. 10 lakh. You achieved your target within 9 years thanks to some favourable outcomes.
In such a scenario, the best course of action could be to move your capital from the equity fund to a debt category fund. This strategy can help in securing your gains by shifting from a high-risk investment to a more stable one, and protect your capital from market volatility. You can set up a trigger sip which automatically shifts your capital from the equity fund to a liquid fund of your choice whenever your target is reached. This not only locks in your profits but also makes sure that your investment stays safe from any sudden market downturns.
Advantages and benefits of using Trigger SIP in mutual funds
Take a look at some benefits offered by a trigger sip:
- Since triggers are predefined, the need to monitor the market constantly is eliminated. Once you have set the triggers the investment process runs automatically.
- Trigger SIPs also help reduce emotional bias, as the decision to exit or enter a fund is driven by specific criteria rather than emotions or what others are doing. Trigger SIPs ensure that investment decisions are made on factors such as NAV levels, market indices, or predefined events which minimises impulsive decisions that can pop up from short-term market fluctuations and emotional reactions to them.
- A big benefit of trigger SIPs is that they allow you to take advantage of market downturns. For example, investments are made regularly in normal SIPs, regardless of market conditions. This means that during a bull run, you’ll be buying fewer units with the fixed amount. With a trigger SIP, you can predefine the price at which you want to invest in the mutual fund. You can set a trigger to invest when the NAV of the fund falls to a certain level, or when a market index drops by a certain percentage. This means you’ll be buying more units when the market is down, and earn higher returns.
- Investors get a better opportunity to time the market compared to normal SIPs with trigger SIPs as they allow you to respond to market movements more strategically. Due to this, one also gets the opportunity to earn higher returns.
- Trigger SIPs are highly customisable. You can select triggers based on price, events, index movements, NAV, and capital accumulation.
Conclusion
Trigger SIPs allow investors to set conditions that must be met before an investment is made. Once the condition is met, an action defined by the investor gets taken automatically. These triggers can be based on various factors such as price, specific events, NAV of the fund, capital, and movement of the index.
A trigger sip also offers many advantages over regular SIP, but investors should consider some factors to make sure it is suitable for their investment strategy. Firstly, trigger SIPs are much more complex, which makes them more suitable for investors with significant financial knowledge and experience. New investors should initially try and stick to regular SIPs. Secondly, investors need to be well-versed in how different triggers, such as NAV levels or market events, can impact their investments.
Not all mutual funds provide free entry and exit. Some funds charge fees for transactions, and these costs can impact the overall returns especially if triggers are set to frequently buy or sell units. Consulting with a mutual fund advisor will give you a lot more clarity on whether a trigger SIP is suitable for your specific financial situation and goals. An advisor can help you understand how you can set and manage various triggers and make a strategy that aligns with your risk tolerance and investment goals.
