The Hindu Business Line : ICICI Pru Target Return Fund: Sweeping options

The ups and downs of Indian stocks over the past five years drive home the point that an active approach is essential if you are to reach your financial goals, with an equity portfolio. ICICI Pru Target Return Fund addresses this need.

It allows the investor to specify preset “triggers” at which the fund will book profits on his behalf, it will sweep the proceeds into debt funds. The fund is diversified, open-end and plans to invest in the BSE-100 stocks.

How it works: The fund allows you to set return targets at 12, 20, 50 and 100 per cent. If and when the target is reached, the fund allows you to sweep either the gains alone (appreciation) or the entire investment (capital plus appreciation) into any of the four debt funds offered.

The menu includes ICICI Pru Floating Rate Fund, Short Term Debt Fund, Liquid Fund and Income Plan. Pluses: Equity funds in India have been quite unsuccessful at managing market declines, with the result that gains made in a bull market are often swiftly surrendered in a market fall.

By allowing you to redeem units based on preset targets, this fund takes away the “emotional” component of equity investing. As the fund is being launched after a sizeable correction, the probability of the fund delivering the target returns from current levels is also high.

Minuses: However, the fund does have some shortcomings. Do note that if the market were to correct steeply from the time you invested (before the NAV had any chance at appreciation!), you could still face capital erosion on this fund.

Two, by cutting your exposure the moment the target return is reached, this fund caps further upside to your investment. Should the market begin a secular bull run over the next few years, you would be better off with a buy-and-hold approach with a normal equity fund. By cutting your equity exposure based on a target, you would be depriving your investments of this benefit of compounding.

Three, while this fund may help you reduce equity exposure through a trigger, you will still have to take an “active” call on when you would like to re-invest gains or principal.

Finally, the fund’s structure may require greater churning and higher cash levels., which may force it to stick to the most liquid names in the BSE-100. These factors suggest that while the fund may participate in any market upside, it may not be among those that sharply outperform the market.

What to choose: Given that the fund offers four trigger options and four debt funds into which investors can sweep their gains, which options should an investor choose? Your choice of target will depend on your investment horizon. But it needs to be mentioned that is best for investors with a horizon of two years or less to stay away from equity investments altogether; given the prospect of downside risk to their investments, after the recent rally.

Investors with a longer horizon may choose between a target of 50 or 100 per cent, based on their risk appetite. On the debt fund options, our advise is to stick with the safest one- the ICICI Pru Liquid Fund. Both the Income Plan or the Floater Fund carry a significant price risk. The purpose of cashing in on your equity fund at the right time may be defeated if part of that return is wiped out by bond market volatility.

The fund manager is Sanjay Parekh and the NFO closes on May 14 2009.

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