Trigger options helps choose the levels at which one wishes to enter equities or exit them.

I have been investing in mutual funds through SIPs. I hold HDFC Top 200, HDFC Equity, HDFC Prudence and HDFC Mid-Cap Opportunities and a small sum in Sundaram Mutual. I have been investing over a period of three years.

Market is at its 30-month high. Valuations too seem high. In this scenario what should be the strategy for retail investors? Should I book profits (fully/partly)? Also, should I continue my SIP or stop my SIP and divert my funds to pure debt? Should I divert 50 per cent of my investment in debt and continue SIP for the balance amount?

I am 35 years old and have a ten-year time horizon. I am asking this question to safeguard myself against another downtrend like the one in 2008.

Balaji Venugopal, Vizag

Your question is very valid and at this juncture (with the Sensex trading at over 21 times) this may be the foremost query in a cautious investor's mind. You hold funds that have demonstrated sound performance, especially during your holding period of three years. Holding good funds should, to an extent, provide you comfort. This does not mean that the funds will be highly resilient to market correction; they may at the most be better placed to handle the correction and also bounce back in style given their past experience. However, to make the best of these funds, you should not stop your SIPs during market declines.

Nevertheless, your portfolio needs some rejig and a varied strategy to deal with a market that holds risk of declining. You have almost all your capital in funds from the HDFC stable. While the fund house is no doubt sound and fairly discreet in its strategies, you may lose out on the benefit of different strategies and exposure that other funds houses may offer. Hence, we suggest that you first broad base your holdings. While doing so, sweep the current profits in your portfolio.

Book profits

You seem to be sitting on a decent 40 per cent absolute gain. Book these gains into cash profits in the following manner: Exit HDFC Equity, to the extent you do not suffer an exit load (in HDFC funds you are likely to suffer a one-per cent exit load for redemptions made within one year of allotment). If you had invested in HDFC Mid-Cap Opportunities during its NFO, then you would be able to exit now (the fund was recently converted to an open-end structure). Fully exit the fund. Do take note that we are suggesting these exits to merely diversify your investments; the funds have been performing quite well.

Set triggers

Proceeds from the sale of HDFC Mid-Cap Opportunities can be invested in IDFC Premier Equity. Use the entry and exit ‘auto-trigger' option facility available with the fund. This would allow you to set triggers – whether NAV levels or Sensex levels - to enter and exit equities.

The initial sum would be placed in debt and transferred to equity on activation of the triggers you set. Similarly, profits from the auto-trigger exit plan (if you opt for it) would also be swept in to short-term debt.

Since the markets appear elevated at present, set an entry level of at least 10 per cent below the current market levels to enter equity from debt.

From the profits booked in HDFC Equity, start a similar trigger option in Reliance Equity Opportunities. We are suggesting slightly aggressive funds, taking into account your age and investment horizon.

We are unable to assess your Sundaram Mutual holding as you have not provided the name of the scheme.

Stop SIPs in HDFC Equity and reduce your SIP in HDFC Top 200 and HDFC Prudence to half the present amount. Invest the profit booked in HDFC Equity in to HDFC MIP Long Term. Start an index plan (where you invest from debt to equity at levels determined by you) in HDFC Top 200 and HDFC Prudence.

This would ensure that you buy only at levels that you are comfortable with. Adopt this strategy for a year and take a relook at your portfolio and market levels. You may go back to SIP route for all the funds if you are not comfortable with this strategy.

We are suggesting this strategy only because you seem to be worried about the market levels. Trigger options help you choose the levels at which you wish to enter markets or exit.

Besides mutual funds, you can also opt for ETFs during times of market corrections. If are an active observer of markets, try to buy the Benchmark Nifty ETF and the Benchmark BSE 500 index fund if markets undergo a correction of 10-15 per cent or more. Buy them in small lots and keep accumulating them on further dips.


(This article was published in the Business Line print edition dated August 29, 2010)
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