A TARGET RETURN SCHEME ensures profit-booking at specific targets and transfers the money to debt funds
You would have heard it a million times – invest in equities only for the long term. Financial advisors will always berate you for making short-term profits, thereby losing sight of the bigger picture.
But most of them would also advise you to maintain an asset allocation. That is, say you have invested Rs 10 lakh in a 40:60 debt-equity ratio. Now if the market goes up 25 per cent in the next six months, your equity portion has risen from Rs 6 lakh to Rs 7.5 lakh.
At the same time, the debt portion has fallen, say, from Rs 4 lakh to Rs 3.5 lakh.
So, after six months the new position is Rs 7.5 lakh in equity and Rs 3.5 lakh in debt. That is, a total of Rs 11 lakh. In order to maintain the same 40:60 ratio, you will need to sell shares of Rs 90,000 and invest in debt. After the rejig, the portfolio would have Rs 6.6 lakh in equity and Rs 4.4 lakh in debt.
Of course, it is a rather tedious task to do it on your own because it requires constant tracking of the portfolio and changing debt-equity ratios. Many may not even be qualified to do this. The other option is in the form of a financial planner, but they come at a price.
However, fund houses have started coming out with products that would do the same for you. For instance, ICICI Prudential Asset Management has launched an open-ended equity fund called Target Return Fund. This fund, basically a systematic withdrawal plan (SWP), books profit regularly and transfers the appreciation to a debt fund. The investor, therefore, gets the advantage of market upswings.
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“Equity investments always accompany greed and fear. When markets go up, people become greedy and when they crash, investors are fearful. To remove these emotional biases, we thought of a system that will capture the upside and book profits regularly, once the targeted returns are achieved,” said Sanjay Parekh, senior fund manager, ICICI Prudential Asset Management Company.
The fund is currently in the subscription phase and will close on 14 May
FUND DETAILS
There are four return targets for investors – 12 per cent, 20 per cent, 50 per cent and 100 per cent. When the investment achieves any of the stated targets, the money is diverted to a debt fund. The customer can then withdraw, either the profit or the entire amount (appreciation and initial investment amount) to the selected debt fund.
The investor has choice of four debt funds. These include liquid fund, bond fund, floating rate fund and short term fund. If the customer does not select any of the options, the appreciation is automatically transferred to ICICI Pru’s Liquid Plan.
The investor has the option to change the level of appreciation (called trigger). But to change the trigger, the customer will need to buy units worth Rs 1,000.
DON'T SIP
This fund does not encourage systematic investment plan (SIP). If the investor wants to invest through an SIP, the trigger facility is not available. "This is primarily due to the difference in the philosophy. SIPs are for investors, who want the entire money to grow over a period of time. In most cases, such investors withdraw when they are closer to the goal. This fund, on the other hand, is for customers who want to do profit-booking regularly," Parekh added. The fund also doesn't offer dividend option.
CHARGES
Just like any other SWP, this fund too is expensive. Target Return Fund charges an exit load of 1.5 per cent for withdrawals within six months of investment and 1 per cent if the money goes out between 6 months and 12 months. This means that every time profits are booked and transferred to a debt fund, within one year of investment, there will be a fee attached to it. Additionally, there will be an entry load for investing in the debt fund. And then, an exit load when you want to redeem.
INVESTMENT STYLE
The benchmark for this fund is BSE 100. "But we will invest in companies whose stocks are liquid. One way of identifying such stocks are businesses with market-cap of over Rs 6,000 crore," said Parekh.
The fund also has three theme options – consumption, capex and outsourcing. In consumption, the fund will look at industries such as telecom, housing finance, fast moving consumer goods, media, cement and others. Capex will include power, construction and engineering and the outsourcing will be dominated by IT-company stocks.
OLD WINE IN A NEW BOTTLE
Industry experts suggest that the profit-booking option is necessary in the current market as it will not see a linear growth. But profit-booking also puts pressure on the fund's performance. "Even if a fund manager believes that some stock will give higher returns, he will still need to sell it due to the stated mandate," said Sriram Venkatasubramanian, head-wealth management, FCH Centrum Wealth Managers.
The trigger facility is also not new to the industry. Some mutual funds launched in the past have this as an option. Both Principal Mutual Fund and Edelweiss Mutual Fund offer this in their schemes. Edelweiss' EDGE fund also gives the option of target NAV as well as time period.
CONCLUSION
It is a good fund for investors, who don't want to go through the hassle of either managing the money themselves or hiring a professional to do so. The costs, however, of transferring money from equity to debt, entry load of debt and exit load could make this product a tad costlier. Do a cost-benefit analysis before investing.