To get back equity-wary investors, fund houses and their portfolio management services (PMS) have started schemes that will regularly book profits. In these funds, mutual funds and PMS will realise appreciation at specific target returns and transfer profits either to a safer investment avenue or give the money back to the customer.
ICICI Prudential Asset Management and Edelweiss Mutual Fund are the first two to launch such schemes, which are at the subscription stage. Edelweiss EDGE Fund will close on May 8 and ICICI Prus Target Return Fund will close on May 14. Reliance Mutual Fund too plans to launch a similar themed fund Target Appreciation Fund.
While ICICI Prudential and Reliance Mutual Fund has started a fund completely dedicated to such a scheme, called Target Return Fund and Target Appreciation Fund respectively, Edelweiss Mutual Fund has made it a part of its equity diversified fund called EDGE Fund.
Under PMS, JM Financial is offering this scheme under its India Resurgent Portfolio while ICICI Prudentials scheme is called Target Return Portfolio.
This strategy is the need of the hour in the current market situation. Due to the recession, the markets are bound to see a lot of rise and fall. Growth will not be linear till the global economy comes out of the turmoil, and that at least is two-three years away, said Vipul Shah, director and head of private wealth group, JM Financial. In fact, the company said that it would close the scheme if the portfolio generates 50 per cent of absolute returns within two years.
Though the central theme of the mutual funds are the same book profits on appreciation all three funds operate this in different way. ICICI Prus fund has four targets called triggers. These include 12 per cent, 20 per cent, 50 per cent and 100 per cent. An investor can opt for any one of them and whenever the investment appreciates meets the targets the profits are booked and transferred to a debt fund.
Edelweiss has multiple options for an investor. He can select its own target or even a date at which the money should be redeemed. He can either opt for transferring the money to a debt fund or get the cheque for the profit.
The working of Reliance Mutual Funds scheme is slightly different. Target appreciation Fund takes the 45-day average of takes Bombay Stock Exchanges Sensex as a base. It keeps giving the appreciation back to the investor when the base appreciates by 20 per cent, 40 per cent, 60 per cent, 80 per cent and 100 per cent.
These schemes will give comfort to first-time investors, who usually come when markets are at peak and then lose out money when they fall. These schemes will book profits regularly in a discipline manner, said Sundeep Sikka, CEO, Reliance Mutual Fund. He points out that this will encourage more investors to come to mutual funds. Currently, only 3 per cent of the population invest in mutual funds, Sikka said.
Investment adviser too gave a thumbs up to the idea. Profit booking in a disciplined manner is essential. Investors tend to become greedy when they see appreciation and become fearful during correction, said Sriram Venkatasubramanian, head wealth management, FCH Centrum Wealth Managers.
But he also added that in such schemes, fund manager will face a constrain. Even if they believe that some stock will give higher returns if held, the fund managers will have the pressure to sell due to the stated mandate, Venkatasubramanian said.