Auto Balance your Portfolio using TRIP feature of Mutual Funds

Portfolio balancing at regular intervals, is vital, to optimize your returns. However, so many of us are short of time to monitor and re-balance our portfolio. Here comes a TRIP feature in Mutual Funds - a feature that allows you to automatically balance your portfolio between debt and equity...Read on...

Why Balance the Portfolio?

A balanced portfolio leads to optimized returns. And the extent of balancing obviously depends on multiple factors like your age and risk taking capability, among others. Some readers feel that there is just too much effort involved in monitoring and re-balancing the portfolio from time and time - especially in a volatile market scenario. And even if they do make the effort, the result may not be more than 2 to 3% difference in returns.

To all such readers, here is the first message. 

If you feel 2 to 3% change in RoI is not going to make much of a difference, then read this --> Four Levers that create Wealth for you

A 3% ROI difference can make or break your Financial Freedom dream. It is a much bigger lever at your hand than striving for the next salary increment or reducing your expenses or saving on taxes...much much bigger than you can probably believe.

To the readers who have understood the importance of 2 to 3% higher RoI, and are short of time to monitor and re-balance their portfolio to optimize the returns, here comes a feature in Mutual Funds called as TRIP. 

What is TRIP?

TRIP stands for Trigger Investment Plan. 

As the name suggests, it is an investment based on a (market) trigger. Unlike the SIP (Systematic Investment Plan), which invests a fixed amount at regular frequency, TRIP invests a variable amount and that too depending upon the trigger condition being met. Now, don't take me wrong about SIP here. SIP is the simplest possible tool in a new comer's hands. It has an unbelievable set of advantages. Read here for simple strategies to make your SIP work even harder --> 5 Simple Strategies to make your SIP work harder

TRIP is a specific new feature available with very limited mutual fund houses as of now. This facility enables the Unit holders of 'Source' scheme to set triggers based on any predetermined event, to enable the Fund to automatically transfer, on behalf of the Unit holder, the specified percentage of the amount registered in the 'Source' scheme to select 'Target' scheme on the trigger date.

So, essentially, it allows funds to move from 'Equity' to 'Debt' Schemes as well as 'Debt' to 'Equity' Schemes at predefined Index levels - thus allowing you to automatically recreate the portfolio balance that may have got disturbed because of market movements - ultimately providing you with optimized returns,

An Example

Let us say that you have a mutual fund portfolio of INR 200, with the asset class mix as per your risk taking ability, as follows:

Equity Fund Allocation = 70% = 0.7*INR 200 = INR 140

Debt Fund Allocation = 30% = 0.3*INR 200 = INR 60

Let us consider a scenario where the market is on an upswing during the current volatile cycle, and let us assume that the markets rise by 40% in a span of 6-9 months time. This volatility shakes up your portfolio mix. Let us see how.


As the markets rise, your equity allocation also is likely to go up by at least 40% (if you have invested in at least above average funds, else it is time to change the funds :)). Let us also assume that your Debt Funds have moved by around 5% in the same time period.

Here is your new portfolio balance after 9 months:

Equity Allocation (up by 40%) = INR 140*1.40 = INR 196

Debt Allocation (up by 5%) = INR 60*1.05 = INR 63

Total New Portfolio Balance = INR 196 + INR 63 = INR 259 (Approx 30% jump from the initial portfolio of INR 200)

Though 30% is an awesome return, but look at your portfolio allocation % once again. You will find that your portfolio balance has got disturbed.

In your new portfolio:
Equity Allocation % = INR 196 / INR 259 = 76% (6% on the higher side)

Debt Allocation % = INR 63 / INR 259 = 24% (6% on the lower side)

And this new portfolio (im)balance is likely to mute your returns in the future when equity is on the downswing. Therefore, as a smart investor, you would want to move some money from your equity to your debt funds to regain the balance. If you sell equity funds worth INR 15 and buy debt funds worth the same amount, you will restore your portfolio balance.

This is how your portfolio will look after re-balancing:

Equity Allocation % = INR 181 (INR 196 - INR 15) / INR 259 = 70%

Debt Allocation % = INR 78 (INR 63 + INR 15) / INR 259 = 30%

This re balancing your portfolio will continue to assure optimized returns for you.

The same holds true when the market goes down. The only difference is that you would want to move some money from your debt portfolio to equity portfolio after it has gone down sufficiently.

Easier said than done, all this monitoring and re balancing of portfolio needs some investment of time and effort. TRIP just helps you automate this entire process.

Using the TRIP feature of mutual funds:

I will set a trigger on 40% market going up within a span of 1 year.

I will decide the % of funds that should move from equity to debt if the trigger is hit (8% in our case - INR 15 to be moved from INR 196)

And that's it. This trigger takes care of the upswing.

I can set similar triggers from debt to equity to take care of the downswing.I can set multiple triggers too.

With this, I have just gotten rid of continuously monitoring the market and and moving the money from debt to equity and vice versa.

TRIP Benefits to investors

1/ Ensures your investments are made at targeted levels. 
2/ The facility enables automatic decision making at levels with which you are comfortable, rather than fund house deciding the movement.

3/ You can take advantage of market movements without the hassle of constant tracking. This way, volatility works to your advantage.

4/ Initial investments in Liquid/Debt Schemes facilitate earning income till investments are transferred to equity funds, thus enabling STP (Systematic Transfer Plan)

Which funds offer TRIP feature?

To start with, Mirae has started offering this TRIP provision in some of their selected schemes. The Source as well as the Target Schemes for TRIP shall be as follows:
1/ Mirae Asset Cash Management Fund
2/ Mirae Asset Ultra Short Term Bond Fund
3/ Mirae Asset India Opportunities Fund
4/ Mirae Asset Emerging Blue-chip Fund
5/ Mirae Asset Tax Saver Fund

Summary

In a volatile market, portfolio re balancing is vital for massive wealth creation. Use the TRIP feature to maximum and let the fund house take care of your portfolio re balancing, based on the triggers that you pre decide.

Cheers

Manoj Arora

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