Let me ask you a simple question. What is the rudimentary purpose behind investing in mutual funds? Simple question, right? And it’s got a simple answer: allowing your ‘extra’ money to grow, albeit at a certain risk. Every investor is clear about what he wants from his investments – a profit. Why is it then that he fails to protect the profits that he’s already made? One of the reasons is one of the seven sins: greed. Isn’t it ludicrous to take money out of an investment that has the potential to get you more? Well, not really.
Ideally, investors should book profits regularly simply because good times can turn bad. It’s better to buy an umbrella in advance rather than get caught in a sudden downpour. But we are all so happy making hay while the sun shines that we forget to prepare ourselves for the rains. And this is where ICICI Prudential Mutual Fund has decided to help investors out.
The AMC’s new offering—Target Returns Fund—has a facility by which investors can book profits automatically. In this fund, gains made above a certain trigger percentage get redeemed automatically from the fund and are switched to a fixed income fund, which is chosen beforehand. The investor can choose trigger percentages of 10, 12, 20, 50 or 100. Whenever the gains since the initial investment or since the last trigger cross this percentage, the money gets switched.
Effectively, the fund seeks to automatically emulate an investor who regularly books profits and shifts those profits to a safer investment. The various percentages that one can choose depend upon one’s risk profile. To find out if such automated profit booking will work or not, Value Research carried out a simulation to test the hypothesis. We based our simulation on this fund’s benchmark, the BSE 100 index. We assumed that on January 1, 2000, an investor put in Rs 1 lakh in such a fund. This hypothetical fund had the same trigger rules, which were tested at the various percentages available to the investor. We also assumed that the triggered switches would transfer the gains to ICICI Prudential Income Fund, which is one of the choices available.
In our simulation, we found that at the trigger level of 10%, the investors’ Rs 1 lakh would have grown to a total of Rs 2.73 lakh. The equity portion (the amount that stayed in the BSE 100 fund) was at about Rs 48,000, while the booked profits in the income fund had grown to about Rs 2.26 lakh. In the BSE 100 fund itself, the money would have grown to Rs 1.94 lakh. However, the real story is in how the money grew and was saved from reducing. In the BSE 100 itself, the Rs 1 lakh would have grown to about Rs 4.05 lakh at the January 2008 peak of the markets and then collapsed to a trough of Rs 1.63 lakh. In the profit-booking mode, the early-2008 peak was just Rs 2.9 lakh from which the value fell no lower than about Rs 2.4 lakh at the worst time.
As is clearly evident from the simulation, this new fund’s approach is decidedly low-risk. It might not produce ground-breaking gains, but it most certainly will earn you reasonable returns and protect them as well. The best part about it is the automated approach. What we can’t make ourselves do, the machines will do that for us effectively. The fact that our profits get booked regularly by themselves is clearly the highest selling point of this approach.
It’s like moving around with a ubiquitous umbrella above our heads. A few raindrops might fall on us, but we’ll be saved from getting drenched.
The author is CEO, Value Research
